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income-tax Officer Vs. B.D. Traders - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Allahabad
Decided On
Judge
Reported in(1992)43ITD45(All.)
Appellantincome-tax Officer
RespondentB.D. Traders
Excerpt:
.....registration was that the lady partners did not participate in the conduct of the assessee-firm's business. this plea of the 1d. ito was also untenable because of the ratios in the cases of chitra cinema (supra), untied patel construction co. (supra) and k.d. kamath and co. (supra). thus, the second reason for denial also goes.14. since both the reasons for denial are not found to be tenable by the above judicial pronouncements, the 1d. dc(a) in our view correctly vacated an erroneous finding. in such a finding, we do not see any omission or mistake and, therefore, no merit in the ground taken before us. in fact, the conditions pointed out by the 1d. ito were not required to be there for granting the registration. the conditions which were required to be there, are as under: the.....
Judgment:
1. These matters are consolidated for being disposed of by a single order, for the sake of convenience.

2. To start with, we take up Revenue's ITA No. 603/All./1989 for the assessment year 1985-86. The effective ground taken is as under: 1. That the 1d. Dy. CIT (A) has erred in allowing registration to the firm as the two lady partners out of three partners were sleeping partners and they had not contributed anything towards capital of the firm.

3. In the assessment order, the status shown is as unregistered-firm.

The method of accounting was mercantile and the accounting period was the year ending on 30-9-1984. The assessee was dealing in electrical goods etc. Return was filed showing income of Rs. 5,880. Assessment was framed on 28-3-1988, on total income of Rs. 50,630 under Section 143(3) of the Income-tax Act, 1961.

4. In the present case, a deed of partnership was drawn on 15-3-1984, between Raj Kumar Agarwal as karta of his HUF, Smt. Rita Kumari and Km.

Smita Arora. The same was filed before the learned ITO on 14-5-1984.

The ratio of shares was 10%, 40% and 50% respectively. It was noticed by the 1d. ITO that the partner, Km. Smita Arora was the daughter of the male partner, Shri Raj Kumar Agarwal. It was discovered that the two ladies partners had not invested any capital nor any business activities were being carried on by them. Since the 1d. ITO on the basis of R.C. Mitter & Sons v. CIT [1959] 36 ITR 194 (SC) had some doubt about the genuineness of the firm, required the assessee to explain as to why in the peculiar circumstances of the assessee's case, the registration should not be refused under Section 185(1)(b) of the Act. On behalf of the assessee, mention was made of the ratio in the case of Himalaya Engg. Co. v. CIT [1965] 57 ITR 762 (Pat.). The 1d. ITO considered that the said ratio was inapplicable. He took up two conditions for disallowing registration namely that the ladies had not contributed capital and secondly were also not participating in the business. Thus, the registration was refused vide order dated 28-3-1988 framed under Section 135(1)(b) of the Act.

5. The said action of the 1d. ITO was contested and before the 1d. DC (Appeals) Shri V.K. Agarwal, the 1d: Advocate argued that the 1d. ITO erred in refusing registration. It was pointed out that capital contribution by the partners was not an essential ingredient for constitution of the firm. It was submitted that the 1d. ITO had not found that any partner was benamidar of other. It was explained that in the assessee's case, there was a duly executed partnership deed, profit and losses were being shared and the business was being carried on on behalf of the partners. It was pointed out that since these three ingredients were present, there was no justification for refusing registration. It was said to be not the 1d. ITO's case that firm was not genuine. The ratios in the cases of Chitra Cinema v. CIT [1972] 86 ITR 203 (All.), United Patel Construction Co. v. CIT [1966] 59 ITR 424 (MP) and Himalaya Engg. Co. 's case (supra) were relied upon. Reliance was also placed on the finding of Jaipur Bench of the Income-tax Appellate Tribunal in the case of Rajesh Corporation v. ITO [1988] 25 ITD 420 (Jp.) (TM). The 1d. DC (A) considered the facts available on file and the submissions and the ratios and allowed registration to the firm for the year under consideration.

6. Hence the present appeal by the Revenue before us. The 1d. D.R. Shri S.K. Sagar supported the 1d. ITO's order on the point and further pointed out the points picked up by the 1d. ITO for denying registration.

7. On behalf of the assessee, the 1d. counsel, Shri V.K. Agarwal supported the finding under challenge and argued further that capital contribution for becoming a partner in the firm was not a mandatory condition under Section 185(1) of the Act. It was pointed out that it was also not necessary that all partners should be working in the business of the firm. According to the 1d. counsel, it was not the Revenue's case that any partner was the benamidar of other. Reliance on behalf of the assessee was placed on the ratios in the following case's : (i) Ratanchand Darbarilal v. CIT [1985] 155 ITR 720 23 Taxman 53.

(SC) 8. On the basis of above submissions and the ratios, it was the 1d.

counsel's case before us that the 1d. ITO was not Justified to deny registration and that such erroneous action was correctly rectified by the 1d. DC (A). Our attention was also invited to Section 4 of the Indian Partnership Act for the purpose that the conditions picked up by the 1d. ITO for refusing registration were not there in the provision.

According to him any interference was uncalled for.

9. On behalf of the Revenue, the 1d. Departmental Representative submitted that the cases were distinguishable on facts.

10. Submissions made on behalf of the contesting parties have been heard and record carefully perused. In the present case, the registration is seen to have been denied for two reasons namely : (b) They were also not participating in the conduct of the assessee's business.

The existence of these two conditions is not in doubt, but at the same time, it is not seen to be the Revenue's case that any partner was the benamidar of another. The 1d. ITO also did not find that the firm was non-genuine. It was also not their case that the firm during the relevant period was not doing business in accordance with the Deed. The registration is seen to have been refused in the above circumstances.

11. When the matter came before the 1d. DC (Appeals), he discussed the facts and circumstances in detail and the ratios and the findings and thereafter agreeing with the submissions, vacated the ITO's finding and allowed registration. Now the issue for our consideration is as to whether in the given circumstances, the 1d. ITO was Justified to deny registration to the assessee or the 1d. DC (Appeals) correctly vacated such denial.

12. The two reasons, which prompted the 1d. ITO to deny registration have been detailed in the preceding paragraphs. One of the reasons was that the lady partners had not contributed any capital and according to the ITO in absence of such contribution, the registration could not be allowed. The position taken by the 1d. ITO is patently erroneous in view of the ratio in the case of Himalaya Engg. Co. (supra), wherein their Lordships of the Patna High Court have held that such non-contribution of capital could not be a ground for refusing registration to the firm. In view of such ratio, the 1d. ITO's such reason evaporates in the air. Thus, for non-contribution of capital by the partners, the firm could not be denied the benefit of registration.

The first reason of the ITO is finished.

13. The other reason picked up for refusing registration was that the lady partners did not participate in the conduct of the assessee-firm's business. This plea of the 1d. ITO was also untenable because of the ratios in the cases of Chitra Cinema (supra), Untied Patel Construction Co. (supra) and K.D. Kamath and Co. (supra). Thus, the second reason for denial also goes.

14. Since both the reasons for denial are not found to be tenable by the above Judicial pronouncements, the 1d. DC(A) in our view correctly vacated an erroneous finding. In such a finding, we do not see any omission or mistake and, therefore, no merit in the ground taken before us. In fact, the conditions pointed out by the 1d. ITO were not required to be there for granting the registration. The conditions which were required to be there, are as under: The following conditions are to be satisfied in order that a firm may be entitled to registration: (i) the firm should be constituted under an instrument of partnership specifying the individual shares of the partners; (ii) an application on behalf of and signed by all partners and containing all the particulars as set out in the rules must be made, (iii) the application should be made before the assessment of the firm for that particular year; (iv) the profit or loss, if any, of the business relating to the accounting year should have been divided or credited, as the case may be, in accordance with the terms of the instrument; and (v) the partnership must be genuine and must actually have existed in conformity with the terms and conditions of the instrument of partnership in the accounting year.

Once such conditions are satisfied, it is the obligation of the ITO under the Act to extend the benefit of registration and allow the firm to enjoy the benefits provided by the Act.

15. In the light of our preceding discussions, it is clear that the reasons of the 1d. ITO are untenable and the conditions required in terms of ratio in the case of Ratanchand Darbarilal (supra) have been satisfied. Our conclusion is that no interference is warranted. We do the same.

17. The cross objection No. 74/All./1989 raised by the assessee is required to be rejected on the simple ground that the same is not relatable to the year under challenge.

18. Before parting with this file, we want to observe that the appellant-revenue is seen to have filed a copy of first appellate order in the quantum matter, whereas such copy should have been of the first appellate order 19. In the result, the appeal and the cross objection both are dismissed.


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