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Commissioner of Income-tax Vs. Kanhayalal Ram Chand - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtPunjab and Haryana High Court
Decided On
Case NumberIncome-tax Reference No. 45 of 1975
Judge
Reported in[1979]119ITR377(P& H)
ActsIncome Tax Act, 1961 - Sections 185
AppellantCommissioner of Income-tax
RespondentKanhayalal Ram Chand
Appellant Advocate B.K. Jhingan and; A.C. Jain, Advs. for; D.N. Awasthy
Respondent Advocate M.M. Punchhi and; Suresh Amba, Advs.
Excerpt:
.....the tribunal shows that the tribunal misdirected itself and failed to take into consideration the relevant facts. paragraph 8 of the order of the tribunal shows that it was considering the question 'whether the deed in question constituted the partnership'.here the tribunal clearly misdirected itself. in view of the misdirection and failure to consider the relevant factors, the question referred to us is answered in the negative......of the firm. on october 26, 1969, kanhayalal and his father-in-law, ram chand, entered into a deed of partnership constituting as the business of the partnership, the share of kanhayalal in the firm m/s. karnal tractors and motor workshop. profits and losses were agreed to be shared in the proportion of 60 per cent. and 40 per cent. the capital of kanhayalal in the firm, m/s. karnal tractors and motor workshop alone with all his assets and liabilities were to belong exclusively to kanhayalal and ram chand was to have no claim over the share capital or assets of kanhayalal in the business of m/s. karnal tractors and motor workshop. a sum of rs. 12,000 said to have been previously advanced by ram chand to kanhayalal as a loan was to be treated as the investment of ram chand. the.....
Judgment:

O. Chinnappa Reddy, J.

1. Kanhayalal was a partner of the firm M/s. Karnal Tractors and Motor Workshop with a 25 per cent. share in the profits and losses of the firm. On October 26, 1969, Kanhayalal and his father-in-law, Ram Chand, entered into a deed of partnership constituting as the business of the partnership, the share of Kanhayalal in the firm M/s. Karnal Tractors and Motor Workshop. Profits and losses were agreed to be shared in the proportion of 60 per cent. and 40 per cent. The capital of Kanhayalal in the firm, M/s. Karnal Tractors and Motor Workshop alone with all his assets and liabilities were to belong exclusively to Kanhayalal and Ram Chand was to have no claim over the share capital or assets of Kanhayalal in the business of M/s. Karnal Tractors and Motor Workshop. A sum of Rs. 12,000 said to have been previously advanced by Ram Chand to Kanhayalal as a loan was to be treated as the investment of Ram Chand. The partnership consisting of Kanhyalal and Ram Chand to which we will refer as sub-partnership applied for registration to the ITO under Section 184(3) of the I.T. Act. The ITO declined to register the sub-partnership on the ground that it was not genuine. His finding that the firm was not genuine was based on the following circumstances : (1) The investment of Rs. 12,000 did not come from Ram Chand but came from his son. Even that was not properly proved. (2) Ram Chand was an old man of 72 years and had retired from service in 1962. His bank pass books were not produced. (3) The share given to Ram Chand was disproportionate to his investment. (4) Ram Chand never drew his share of profit from the firm. (5) Though the firm was said to be dissolved in 1971, the dissolution deed was not produced. (6) Though the partnership deed was written on October 26, 1969, profit was said to be divided from April 1, 1969. (7) Kanhayalal raised several loans both during the previous year and the current year. The order of the ITO was affirmed by the AAC who held that there was no necessity or business expediency for creating the sub-partnership and that it was an apparently collusive arrangement. On further appeal, the Income-tax Appellate Tribunal reversed the orders of the subordinate Tribunals and held that refusal of registration was not justified. At the instance of the revenue, the following question has been referred to us for our decision:

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that refusal of registration under Section 185 was not justified in this case ?'

2. A perusal of the order of the Tribunal shows that the Tribunal misdirected itself and failed to take into consideration the relevant facts. Paragraph 8 of the order of the Tribunal shows that it was considering the question 'whether the deed in question constituted the partnership'. Here the Tribunal clearly misdirected itself. The question was not whether the terms of the deed were sufficient to create a partnership between Kanhayalal and Ram Chand but whether the partnership so created was genuine. The Tribunal expressed the view that the circumstance that Ram Chand was too old to take any interest in any investment or business, the circumstance that the sum of Rs. 12,000 did not in fact belong to Ram Chand and the circumstance that the share of profit of Ram Chand was disproportionate to his investment, were not relevant considerations. We do not agree with the Tribunal that they are not relevant considerations. Each of the circumstances is certainly a relevant consideration though the weight to be given to the individual circumstance or to their cumulative effect may vary from case to case. Similarly the Tribunal expressed the view that the circumstance that Ram Chand did not withdraw his share of the profit did not necessarily lead to the conclusion that the firm was not genuine. The question is not whether each individual circumstance by itself is sufficient to enable the revenue to conclude that the firm was not genuine but whether the circumstances as a whole were not sufficient to lead the revenue to that conclusion. We may further mention that the Tribunal did not also notice the circumstance that Ram Chand was to have no share in the capital investment in M/s. Karnal Tractors and Motor Workshop. The Tribunal also did not give any consideration to the circumstance that the deed of dissolution was not produced. In view of the misdirection and failure to consider the relevant factors, the question referred to us is answered in the negative.


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