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income-tax Officer Vs. Swashraya - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Ahmedabad
Decided On
Judge
Reported in(1985)12ITD218(Ahd.)
Appellantincome-tax Officer
RespondentSwashraya
Excerpt:
1. this set of two appeals, which relate to the assessment years 1975-76 and 1976-77, are filed by the revenue against the order of the commissioner (appeals). the appeals are filed against the decision of the commissioner (appeals) to vacate the orders cancelling registration and renewal of registration to the asses-see-firm originally granted.for the assessment year 1975-76, the assessee-firm was granted registration by the ito. thereafter in course of assessment proceedings for the assessment year 1976-77, while considering the assessee's application for renewal of registration, the ito was of the view that no genuine firm had corns into existence inasmuch as the trustees have joined as a partner in the representative capacity as the trustees of respective trusts. since the relevant.....
Judgment:
1. This set of two appeals, which relate to the assessment years 1975-76 and 1976-77, are filed by the revenue against the order of the Commissioner (Appeals). The appeals are filed against the decision of the Commissioner (Appeals) to vacate the orders cancelling registration and renewal of registration to the asses-see-firm originally granted.

For the assessment year 1975-76, the assessee-firm was granted registration by the ITO. Thereafter in course of assessment proceedings for the assessment year 1976-77, while considering the assessee's application for renewal of registration, the ITO was of the view that no genuine firm had corns into existence inasmuch as the trustees have joined as a partner in the representative capacity as the trustees of respective trusts. Since the relevant trust deed did not authorise the trustees to join as partners, their action to become partners of the firm was clearly in violation of the provisions of Section 47 of the Indian Trusts Act, 1882. In other words, according to the ITO, the trustees by joining the firm had delegated their power to manage the trust property to other persons who were partners in the said firm, which was not authorised by the aforesaid provisions of the Indian Trusts Act. Therefore, the act of joining as partner by the trustees in terms of the trust deed was illegal, contrary to law and against public policy. Such action on part of trustees would result in injury to the interest of the beneficiaries. Therefore, there was no legal and valid partnership which could be said to have come into existence. In this view of the matter, therefore, the ITO declined to continue registration to the assessee-firm for the assessment year 1976-77 and for the same reasons, he cancelled registration granted for the assessment year 1975-76.

2. Being aggrieved, the assessee carried the matter in appeal before the Commissioner (Appeals). It was pointed out to him at the outset that the ITO having granted registration for the assessment year 1975-76, it was not proper or open to him to decline to grant continuation of registration for the assessment year 1976-77. It was well submitted that the trustees were authorised to invest the trust moneys in various stocks, shares, debentures or as deposits with interest or for obtaining rights in any immovable property. The trustees also have residuary rights to make investment in other securities under their absolute and uncontrolled discretion as considered suitable or advantageous. Therefore, the residuary clause clearly invested the trustees with the power to make investments in the manner they liked and there was no restriction on their power in this regard. It was also submitted that assuming for the sake of argument that the trustees had joined the firm in violation of the powers under the trust deed, the trustees would be personally liable to the beneficiaries. But for this reason, there was absolutely no justification for the ITO to refuse registration/ continuation of registration to the assessee-firm. In this connection, reliance was placed on the decision of the Tribunal in the case of Gautam Sarabhai (A-5) Trust [IT Appeal No. 1946 (Ahd.) of 1977-78, dated 19-12-1978].

In that case it was considered on behalf of the department that it would be for the beneficiaries of the trust to challenge the act of trustees if the trustees exceeded the authority conferred by the trust deed. It was also conceded that if the beneficiary condoned the act of trustees, though not authorised under the deed of trust, there would be an end to the matter. It was held in that case that the agreement of partnership would be genuine if the partners intended to give effect to the partnership agreement. Reliance was also placed on other decisions of the Tribunal in Sarladevi Sarabhai (B-17) D. Trust and Ambalal Sarabhai (A-9) D. Trust. In these cases also, the Tribunal had taken a similar view. The Commissioner (Appeals) considered the facts of the case in detail as also the submissions placed before him and found firstly, that as per the partnership deed, the firm was formed to carry on business. Secondly, it has been assessed in respect of such business income in earlier years. Thirdly, in context of partnership, the legal position was that the word 'business' is to be understood in its widest connotation and lastly, the main criteria was whether there is a genuine sharing of profits on exploitation of partnership assets. These criteria are satisfied in the instant case and the decisions of the Tribunal, referred to earlier, clearly support the view canvassed by the assessee. In this view of the matter, he held that the decision of the ITO that there was no genuine firm in existence, was not justified.

The Commissioner (Appeals) also observed that qua partnership, the trustees were individuals and they were required to distribute the income or apply the income for the benefit of the beneficiaries, in accordance with the trust deed after their share of profit in the firm was determined. Therefore, there was nothing wrong in the claim for registration applied for by the assessee and in this view of the matter, therefore, the Commissioner (Appeals) vacated the order for the respective years cancelling registration/ continuation of registration for the respective years under appeal.

3. Being aggrieved, the revenue has come up in appeal before us. It may be stated that in course of hearing before us, apart from the decision in the case of Gautam Sarabhai (A-5) Trust (supra), reliance was placed on the recent decision of the Tribunal in the case of ITO v. Mahor [IT Appeal No. 2268 (Ahd.) of 1982, dated 28-10-1983]. It may be stated that in this decision all the aspects of the controversy were considered in detail and the decision of the Commissioner (Appeals), vacating the orders of cancellation of registration/continuation of registration, was upheld. However, to persuade us to take a different view, Shri Malik, the learned departmental representative, submitted that the above decision need not be followed inasmuch as certain important aspects have not been considered while deciding the controversy. The main stay of Shri Malik was that under Section 47, the trustees could not delegate their power of management to any other person. Now when the trustees joined the partnership firm, they exposed the trust assets to management by other partners who were entitled to manage the same. Therefore, there was implied delegation of the power of management to other partners, which was not authorised under Section 47. Therefore, the partnership was illegal and could not be granted registration or continuation of registration. Shri Malik also referred to the decision in Kotasseri Ezhuthassan Veetil Sankaran Nambi v.Kanholi Illathil Devaki Antherjeenam AIR 1922 Mad. 259. Shri Patel in reply, pointed out that there was no delegation of authority as was contemplated under Section 47. This was the case in which the trustees have made investment in the partnership firm, to which they were entitled to or authorised by the trust deed. In other words when the trustees joined the firm, they joined in their individual capacity. The employment of trust funds was only for the furtherance of the object of the trust with a view to realising maximum return of the investment.

Now, if at all, for the sake of argument, the trust deed had exceeded their authority by making improper investment, the beneficiaries could recover the loss caused to their interest and if there was any acquiescence on the part of the beneficiaries, it would be the end of the matter. It is not open to the ITO to challenge the bona fides of the partnership deed, when requisite conditions relating to registration/continuation of registration were satisfied. Shri Patel further pointed out that the trustees acted in a dual capacity, i.e., qua partnership they were individuals and qua beneficiaries they were having representative capacity. The trust and the partnership are distinct entities and the powers and the obligations which govern the management of trust or the partnership are different and distinct and, therefore, there was no reason to induct the provisions of the Indian Trusts Act, in order to determine the validity or genuineness of the firm. Shri Malik, in reply, referred to the decision of the Tribunal in Leenky [IT Appeal No. 227 (Ahd.) of 1976-77, dated 26-8-1978] and Shri Patel, in reply, pointed out that the said decision was rightly distinguished by the Commissioner (Appeals).

4. We have considered the rival submissions. As pointed out earlier, the controversy is fairly covered by the decisions of the Tribunal, referred to earlier, particularly the last mentioned decision in Mahofs case (supra). Distinction sought to be placed on behalf of the revenue before us and very forcefully argued by Shri Malik, loses sight of the basic issue relating to the obligation of the trustees under the Indian Trusts Act and the rights and obligations of a partner under the Indian Partnership Act, 1932. The concept of dual capacity is well recognised in the case of CIT v. Bagya-lakshmi & Co. [1965] 55 ITR 660 (SC). Now while considering the question of registration, one has to look at the deed of partners and the application of registration to find out whether or not the requisite conditions are fulfilled. The genuineness of firm is a matter of consideration. Now in order to determine this aspect, the revenue has relied heavily on provisions of the Indian Trusts Act, in particular Section 47 thereof. Now this section prohibits delegation by the trustees of the power of management of the trust properties. Now when the trustees had invested the funds belonging to the trust in furtherance of the objects of the trust and that power is implied in the residuary clause to which we have referred to earlier, it cannot be said that there was delegation to somebody else for management of trust property. As pointed out earlier, the trustees have joined the firm as individuals and they are answerable to the firm as individuals only. It is only when the income from the firm is received that they act in a representative capacity and are accountable to the beneficiaries. It is a matter between the trustees and the beneficiaries. In case of loss the trustees may be personally liable to make good the loss. It is for the beneficiaries to challenge the act of the trustees, but it is not open to the ITO, as rightly observed by the Commissioner (Appeals), to determine the genuineness of the firm by inducting the aforesaid provisions of the Indian Trusts Act. The two issues are distinct and different as rightly pointed out by Shri Patel. Therefore, we are not inclined to accept the distinction sought to be placed before us by the learned departmental representative. In our opinion, the controversy is properly dealt with in Mahor's case (supra) and Gautam Sarabhai (A-5) Trust's case (supra) and other allied cases, referred to earlier, and we see no reason to depart from the view taken in the said appeals. We, therefore, see no reason to interfere with the well reasoned order of the Commissioner (Appeals).

1. I have gone through the order of my learned brother. I could not persuade myself to agree with the view taken by my learned brother.

Therefore, I am writing a separate order as follows.

2. These two appeals filed by the revenue against the order of the Commissioner (Appeals) relate to the assessment years 1975-76 and 1976-77. The only issue for our consideration in these appeals is whether the Commissioner (Appeals) has erred in directing the ITO to grant registration to the appellate firm for the assessment years 1975-76 and 1976-77.

3. The facts in short are that originally, the ITO has allowed the registration for the assessment year 1975-76. Subsequently, the order was cancelled by order under Section 186(1) of the Income-tax Act, 1961 ('the Act'). The reasons given by the ITO were that the partnership firm did not carry on any business during the year and, therefore, no valid partnership had come into existence. The second reason given by the ITO was that the firm was constituted of seven partners who represent seven different discretionary trusts and the trustees had no power under their trust deeds to join partnership on behalf of the trusts. Therefore, there was a breach of trust in formation of the partnership. The partnership lacks the principle of agency and had no legal force and such a partnership in violation of the Indian Trusts Act, could not be allowed registration.

4. Being aggrieved, the assessee carried the matter in appeal before the Commissioner (Appeals). The Commissioner (Appeals) has considered the Tribunal's orders and has taken the view that even though the trustees had joined the partnership in breach of trust, as for the partnership, the trustees are individually partners. The ITO, therefore, erred in holding that no genuine firm had come into existence in this case and he directed the ITO to grant registration.

5. Being aggrieved, the revenue has come up in appeal before us. The learned departmental representative, Shri Malik, submitted that the trustees had no power to enter into partnership agreement. When they have acted beyond their powers authorised under the trust deed, their action is void. Therefore, the partnership firm has not come into existence and the ITO had rightly refused the registration. He relied on the decision in Kotasseri Ezhuthassan Veetil Sankaran Nambi's case (supra) and Addanki Narayanappa v. Bhaskara Krishnappa AIR 1966 SC 1300. On the other hand, the learned counsel for the assessee, Shri Patel, submitted that in view of Sub-clause (iv) of Clause 3 of the trust deed, the trustees are authorised to become a partner in the partnership firm and the issue was considered by the Tribunal in earlier years, wherein the claim of the assessee was allowed. His alternative submission was that, if trustees had no power under the trust deed, the grievance can only be to the beneficiaries and to none else. Therefore, the registration to the firm should not be refused.

6. We heard the rival submissions and considered the material on record. Under the trust deed, the trustees have power to invest in any of the following: (i) in shares, stocks, debentures or debenture stock or bond of any company (private or public) or corporation or municipal, supreme or local body or authority in or outside India, (ii) in deposits with interest with any person, firm or company or in bank or banks, (iii) in pursuance of loans on security or immovable property or Fazan-dari rights in any immovable property, or (iv) in any other securities or investments not hereinabove specifically referred, which the trustees may, in their absalute and uncontrolled discretion, consider suitable or advantageous.

The learned counsel has tried to protect the action of the trustees specified under Sub-clause (iv) of Clause 3 of the trust deed. While I read Sub-clause (iv) of Clause 3, I have to read the word 'investment' in the line of investments narrated in earlier sub-clauses. Therefore, Sub-clause (iv) authorised only for investments and not for business.

Investment is different from business. Where the trust deed gives a discretion to invest the trust money at interest on securities, the trustee can only invest in proper securities. In this case the trustees are not authorised to enter into partnership for the purpose of business. Partnership is always involved in a business, while investment simpliciter does not involve business. The trustees in this case are authorised only to invest the trust money in shares, stocks, debentures, deposits, etc., but the trustees are not authorised to run the business from the trust fund or to enter in to a partnership firm.

Therefore, it is a clear violation of provisions of the trust deed. Now the question remains whether this action of the trustees, for which they are empowered under the trust deed, is void or voidable. In case of voidable, the beneficiaries may only be persons who can challenge the action of the trustees, but in case of void agreement even beneficiaries have no right to rectify the agreement entered into by the trustees. In this case the trustees have entered into partnership by contribution of capital of trust fund and thereby allowed the strangers to deal with the property of the trust. Similar case was considered by their Lordships of the Madras High Court, wherein the issue before their Lordships was that when the trustees have no power under the trust deed to introduce a stranger into a trusteeship and deal with the trust property, in spite of that if trustees introduce a stranger into the trusteeship, and authorise him to deal with the trust property, the action of the trustees is invalid and void ab initio.

Therefore, in view of the above decision, when the trustees have acted beyond their powers, their action is void and invalid. Secondly, Clause (iv)(a) of partnership deed requires that the capital required for the business of the firm shall be initially contributed by the partners as specified in schedule hereunder. This means that according to the partnership deed, partners should contribute the capital. From the records, it appears that no capital contribution has been made by the partners except the capital brought from the trust fund. This can be ignored being a void agreement on behalf of the trust by the trustees, and there remains no such capital contributed by the partners.

Therefore, on this basis also, it can be said that the firm was not genuine and not entitled for registration. Lastly, the counsel for the assessee has relied on the earlier decisions of the Tribunal and filed a copy for our perusal. I have gone through the earlier orders of the Tribunal. In earlier years, the view was taken that by contribution of capital in the partnership firms, there was no transfer within the meaning of Section 2(47) of the Act, but so far as Gujarat High Court is concerned, after the decision of the Gujarat High Court in the case of CIT v. Kartikey V. Sarabhai [1981] 131 ITR 42, there is a transfer within the meaning of Section 2(47) while the capital is contributed by the partner in the partnership firm. Therefore, in view of this change of facts, I do not agree with the counsel of the assessee that the issue is covered by the earlier order of the Tribunal.

7. In the result, the view taken by the Commissioner (Appeals) is reversed. The appeals are allowed.

REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 - Inasmuch as it has not been possible for us to come to an agreed conclusion in IT Appeal Nos. 2331 & 2332 (Ahd.) of 1982, we refer the following question for the opinion of the Third Member: Whether the Commissioner (Appeals) has erred in directing the ITO to grant registration to the appellate firm for the assessment years 1975-76 and 1976-77 1. Under a partnership deed dated 26-6-1973, seven persons joined together to carry on the business of money-lending and traders, etc., specified in clause 1 of the deed. The partnership deed provided that each one of these persons acted not on his own, but as a representative of a trust created by a duly made trust deed. Thus, the partner first mentioned, that Smt. Shyama G. Sarabhai represented Sarladevi Sarabhai, Trust No. 1 created by trust deed dated 28-3-1960. Dr. Ambalal Sarabhai represented Sarladevi Sarabhai D., Trust No. 2 created by the trust deed dated 28-3-1960 and so on. The assessee-firm applied for registration for the assessment year 1975-76, which was granted by the ITO. For the assessment year 1976-77, an application for continuation of the registration was put in. While considering this application, the ITO came to the conclusion that there was no genuine firm in existence, since the trustees rather than individuals had joined as partners in their representative capacity as the trustees of the respective trusts.

According to the ITO, the trust deeds did not authorise the concerned trustees to join as partners or to join any business. There was, thus, clear violation of the provisions of Section 47 of the Indian Trusts Act. In the result, the ITO felt that the trustees had delegated their power to manage the trust property to outsiders--a matter not authorised by the Indian Trusts Act. The action of the trustees was illegal, contrary to law and against the public policy. It would result in injury to the interest of the beneficiaries also. The ITO, therefore, held that there was no legal and valid partnership.

Consequently, he declined to continue registration of the firm for the assessment year 1976-77. He also cancelled the registration granted for the assessment year 1975-76. On appeal, the Commissioner (Appeals) vacated the orders of the ITO, cancelling the registration granted for the earlier year and not continuing registration for the second year.

It is thus that the matter came up on appeal before the Tribunal.

2. Separate orders were passed by the two members, who heard the appeal. The learned Accountant Member held that the controversy involved in the case was covered by the decision of the Tribunal in Gautam Sarabhai (A-5) Trust's case (supra) and Mahor's case (supra). On the strength of the decisions in these cases, the Commissioner (Appeals)'s order had to be upheld. The learned Judicial Member, on the other hand, held that the trustees in the present case have not been authorised to run a business or enter into a partnership. There is a clear violation, therefore, of the provisions of the trust deed. In his view, the trustees had acted beyond their powers. Their action was void and invalid. He also found, interpreting Clause (iv)(a) of the partnership deed, that as required by the clause, the partners had not contributed any capital. The firm, therefore, was not genuine and not entitled to registration. The learned Judicial Member also found that the earlier decisions of the Tribunal referred to did not deal with the problem at hand. On the contrary, after the decision of the Gujarat High Court in the case of Kartikey V. Sarabhai (supra) when capital was contributed by the partner to the firm there was a transfer within the meaning of Section 2(47). Thus, displacing the authority of the earlier decision, he directed reversal of the Commissioner (Appeals)'s order.

The point of difference between the two learned Members is phrased as under: Whether the Commissioner (Appeals) has erred in directing the ITO to grant registration to the appellate firm for the assessment years 1975-76 and 1976-77 3. The learned counsel for the department has pointed out that the decision in Gautam Sarabhai (A-5) Trust's case (supra) does not cover the case at all. It related to the individual's appeal and the issue therein was whether there was transfer of capital, etc., in the case.

No question of registration or genuineness of the firm was involved.

The decision in Mahor's, case (supra) was also not relevant. More than that this latter decision has relied on the former decision in Gautam Sarabhai (A-5) Trust's case (supra). Since the issues in both the appeals were entirely different from each other, according to the learned counsel, Mahor's case (supra) was not correctly decided at all.

In Gautam Sarabhai (A-5) Trust's case (supra) a particular view was taken on the question of transfer. This view has been reversed by the Hon'ble Gujarat High Court in Kartikey V. Sarabhai's case (supra). On the contrary, the learned counsel has pointed out that the matter is covered by the decision of the Tribunal in Leenky's case (supra). In that case, the Tribunal found that contrary to the provisions of the trust deed--the deed in the case was similar to the one in the present appeal--the trustee had contributed capital and became a partner with another who incidentally happened to be the beneficiary as well as the trustee of the trust.

4. The partnership deed in the present case was void because if it was allowed to continue, it would defeat the provisions of Sections 20 and 47 of the Indian Trusts Act. A deed which leads to or supports illegality and is opposed to public policy cannot be the basis, according to the learned counsel, of a valid partnership. Registration, therefore, cannot be granted to such an alleged firm. Special stress is laid, in this connection, on the violation of Section 47. The trustee has by delegation of power vested in him even failed in his duties. It was his duty to deal with the trust property in the manner stipulated.

By entering into the partnership, which he was prohibited from doing, the trustee was acting illegally. The decision in Kotasseri Ezhuthassan Veetil Sankaran Nambi's case (supra) is relied on for the purpose.

5. For the assessee, stress is laid on the fact that the genuineness of the partnership is to be judged by realities of the situation. In the present case, seven individuals have joined together to form the partnership. For the purposes of registration, the capacity in which a person becomes a partner in a firm is of no significance, even if that is of importance for the purposes of assessment. Under Section 4 of the Indian Partnership Act, there is no impediment for the constitution of a partnership by representatives of persons acting for them. Such a partnership cannot be regarded as an illegal partnership at all. In the present case, registration was granted earlier and it was continued for the subsequent years. The reasoning given by the ITO for treating the partnership as not genuine is factually incorrect. Even from the point of law, this reasoning cannot be supported. The basic requirements of a partnership are satisfied in the present case. There is no delegation of authority as contended for by the revenue. It is also pointed out that the circumstances in Leenky's case (supra), which are called in as aid to treat the firm as not genuine, do not apply to the present case.

Support for this proposition, according to the learned counsel, obtains in the Supreme Court decisions in CIT v. A. Abdul Rahim & Co. [1965] 55 ITR 651 and BagyaJakshmi & Co.'s case (supra). Analogically, reference is made to the decision of the Gujarat High Court in L. Chhotalal & Co.

v. CIT [1984] 19 Taxman 169 where the well settled law that there is no impediment in a HUF or similar entities becoming partners in the firm, has been stressed. My attention is drawn also to the decision of the Supreme Court in the case of Charandas Haridas v. CIT [1960] 39 ITR 202. According to the learned counsel, Section 47 has no application to the present case. That section deals with the delegation of the trusts in a particular case. This section itself provides by way of exceptions for delegation of specific powers in appropriate case. Section 20 of the Indian Trusts Act also does not apply. The partnership by itself, therefore, cannot be held as illegal, opposed to public policy or in any way contrary to law. Registration has, therefore, to be granted and continued for the subsequent year.

6. In my view, neither factually nor as a matter of law can the genuineness of the partnership be assailed in the present case. That seven persons have come together to form a partnership and had gone through the legal requisites for bringing into existence a partnership cannot be denied. The fact that one or the other represents someone else does not in the case of a partnership make the partnership itself not genuine. Thus, in the case of a guardian representing a minor, a managing director representing a company are all instances in point.

Nor can, as validly claimed by the learned counsel for the department, the provisions of the present deed defeat the provisions of the Indian Trusts Act. Delegation of power to a trustee may be provided for by the trust deed either in general terms or in special terms. If within the power of the former the trustees take action, neither the beneficiaries nor any outsiders can take objection to this. Where circumstances are adverse to the beneficiaries, it may perhaps be open to the beneficiary to ask for compensation from the trustees if delegation is unauthorised. In respect of any trust, the trustees have to take action under their inherent duties and responsibilities for the protection of the trust property, dealing with the beneficiaries as directed and conform in all ways to the stipulations of the trust deed. In doing so, several acts have to be done by the trustees themselves on their own.

So long as these acts are not repugnant to the interest of the beneficiaries, the action of the trustees cannot be questioned. It would not, therefore, be outside the powers of the trustees if they enter into the partnership representing their trust or the beneficiaries subject to the general limitations. The argument of the revenue, therefore, that the provisions of the Indian Trusts Act are defeated cannot be accepted. There is no illegality, there fore, in the constitution of the partnership by the trustees acting on behalf' of the others.

7. Even if, as stated earlier, the decision of the Tribunal in Gautam Sarabhai (A-5) Trust's case (supra) is not regarded as of relevance to the present appeal, I have no doubt that the circumstances in Leenky's case (supra) cannot be called in aid to support the revenue. In that case, ultimately, there was a single person who, in effect, entered into a partnership with himself in different capacities. There was virtually the absence of duality which is an essence of a partnership.

A single person cannot form a partnership with himself, primarily because of the difficulty to enter into an agreement and secondarily on account of conflict of interest. Neither of these difficulties arise in the present case. The mere fact, therefore, that the trustees representing different trusts joined together to form a partnership, would not make the partnership either illegal or not genuine as a matter of fact. The Commissioner (Appeals)'s order directing the grant of registration and continuation of registration has, therefore, to be upheld. I agree with the learned Accountant Member. The matter will now go back to the original Bench, which heard the appeal for proper disposal.


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