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Commissioner of Income-tax Vs. Hind Commercial Company - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 59 of 1967
Judge
Reported in[1974]96ITR722(Cal)
ActsIncome Tax Act, 1922 - Section 26A
AppellantCommissioner of Income-tax
RespondentHind Commercial Company
Appellant AdvocateB.L. Pal and ;S.C. Sen, Advs.
Respondent AdvocateD. Pal and ;R.N. Dutt, Advs.
Cases ReferredC) and Karnani Properties Ltd v. Commissioner of Income
Excerpt:
- masud, j.1. in this reference under section 66(1) of the indian income-tax act, 1922, the question of law which is referred to this court is as follows:' whether, on the facts and in the circumstances of the case, the tribunal was justified in holding that renewal of registration under section 26a of the indian income-tax act, 1922, was wrongly refused to the firm for the assessment years 1958-59, 1959-60 and 1960-61 '2. by a deed of partnership executed in september, 1950, a partnership consisting of sri b. m. kharukha and mrs. kharukha, niece-in-law of sri b. m. kharukha, and sri k. a. choudhury was constituted. each of the said three partners under the said deed had equal shares of the profit and loss of the firm. the firm was duly granted registration under section 26a of the indian.....
Judgment:

Masud, J.

1. In this reference under Section 66(1) of the Indian Income-tax Act, 1922, the question of law which is referred to this court is as follows:

' Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that renewal of registration under Section 26A of the Indian Income-tax Act, 1922, was wrongly refused to the firm for the assessment years 1958-59, 1959-60 and 1960-61 '

2. By a deed of partnership executed in September, 1950, a partnership consisting of Sri B. M. Kharukha and Mrs. Kharukha, niece-in-law of Sri B. M. Kharukha, and Sri K. A. Choudhury was constituted. Each of the said three partners under the said deed had equal shares of the profit and loss of the firm. The firm was duly granted registration under Section 26A of the Indian Income-tax Act, 1922, for the assessment years 1952-53 to 1957-58. For the assessment year 1958-59, the Income-tax Officer refused renewal of registration to the firm on the ground that the partnership firm was not genuine and that Sri K. A. Choudhury was not a real partner. On his refusal to renew registration the assessee appealed against the said order to the Appellate Assistant Commissioner who remanded the case to the Income-tax Officer for making further enquiry and for submitting a report on the evidence adduced by the assessee. The Income-tax Officer duly complied with the said order and submitted his remand report. The Appellate Assistant Commissioner, after examination of the remand report, also came to the conclusion that Sri K. A. Choudhury was merely a name-lender and could not be a real partner and, as such, he confirmed the order of the Income-tax Officer on the ground that the firm was not genuine. On the same ground the Income-tax Officer and the Appellate Assistant Commissioner also refused to renew the registration of the firm for the assessment years 1959-60 and 1960-61. The Tribunal heard the assessee's appeal in respect of the assessment year 1958-59 and, relying on Commissioner of Income-tax v. A. Abdul Rahim and Co., held that registration has been wrongly refused to the assessee-firm and on that ground allowed the appeal and directed the Income-tax Officer to grant renewal of registration to the firm for the assessment year 1958-59. Following its own decision, it has also passed the same order in respect of the two subsequent years.

3. Mr. Pal, on behalf of the revenue, has contended that the Tribunal has wrongly applied the principles of law laid down in Commissioner of Income-tax v. A. Abdul Rahim and Co., : [1965]55ITR651(SC) to the facts of the present case. According to him the Supreme Court has only decided that the registration of a partnership firm should not be refused if only one of the partners is found to be benamidar. In the present case the income-tax authorities have not refused registration on the ground that Mr. K. A. Choudhury was a benamidar. He has particularly drawn our attention to the following observations of the Supreme Court in the said decision at page 658 :

'It is true that different considerations may arise, if the partnership is only between two persons of whom one is a benamidar of the other. In that event the partnership may be bad not because the benamidar has no power to enter into the partnership but because the partnership in law is the relationship between at least two persons and in the case of a benamidar and the real owner in fact there is only one person. It may also be that in a case where a benamidar is taken as a partner with the consent of the other partners, he will only be a ' dummy '. We do not propose to express any final opinion on the said two questions, as they do not arise in this appeal.'

4. Reliance has also been placed by him on R. C. Mitter & Sons v. Commissioner of Income-tax, [1959] 36 I.T.R. 194 (S.C.)in support of the contention that:

' In order that a firm may be entitled to registration under Section 26A of the Act, the following essential conditions must be satisfied, viz.,

(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 the 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 under Section 23, for that particular year ;

(iv) the profits or losses, 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. '

5. He has also contended that in the present case the renewal of registration was refused because the income-tax authorities had found from the various facts that the entire partnership business was not genuine and the transations and the business were not in accordance with the partnership deed or with the rules framed under Section 26A. In support of the said contention he has relied on Sundar Singh Majithia v. Commissioner of Income-tax, [1942] 10 I.T.R. 457 (P.C.). Reference has also been made by 'him to Commissioner of Income-tax v. Hassanally and Sons, : [1971]81ITR282(Cal) .

6. Dr. Pal for the assessee, on the other hand, has argued that on the facts as found by the Tribunal the principles of law laid down in Commissioner of Income-tax v. A. Abdul Rahim and Co., : [1965]55ITR651(SC) would apply with equal force to the facts of this case. According to him the genuineness of a partnership firm is a finding of fact which has not been challenged in the way the question of law has been framed. It is now necessary to express my views on the matter.

7. The Income-tax Officer has come to the conclusion that Sri K.A. Choudhury is an ordinary man who is just a name-lender and brought into the picture with the sole purpose of reducing the income-tax liability. He has further held that the firm is not genuine inasmuch as Shri K. A. Choudhury has no experience of the partnership business which happens to be brokerage in jute products. He came to the said conclusion on the following finding of facts :

(a) That Shri K. A. Choudhury admitted in his evidence that prior to his joining in this partnership firm he had a small shop in Delhi in fodder and cattle food and his income never reached taxable limit.

(b) He does not appear to be looking after any business of the firm.

(c) Admittedly, he is a salaried employee of M/s. Banaspati Distributors (P.) Ltd. since 1952 on a monthly salary of Rs. 300 p.m. from which he was maintaining himself, his wife and two children.

(d) He has never drawn anything from the firm for his personal maintenance.

(e) He has at present no asset worth-named and has also no bank account in his personal name.

(f) Sri B. M. Kharukha is the uncle-in-law of Smt. Kiron Kharukha, the two partners.

(g) A gift was made by Shri K. A. Choudh'ury in favour Of the sons of Mrs. Kiron Kharukha.

(h) M/s. Banaspathi Distributors (P.) Ltd. belong to the Kharukhas as all the shares of the company are held by them.

(i) Sri K. A. Choudhury has admitted that the withdrawals of money by him from the firm have not been utilised by him for domestic requirements and that these sums were utilised for gift and for payment of taxes.

(j) The entries in the books of account show that during the preceding four years Sri Choudhury's income is as follows :

Rs. (a) The year ending on 31-5-53 24,708 (b) The year ending on 31-5-54 8,966 (c) The year ending on 31-5-55 22,260 (d) The year ending on 31-5-56 27,176 Against the above income he had the following withdrawals:

Rs. (a) The year ending on 31-5-53 Nil (b) The year ending on 31-5-54 1,555 (c) The year ending on 31-5-55 2,174 (d) The year ending on 31-5-56 65,533 Out of the withdrawals of the said sum of Rs. 65,533 he made a giftof Rs. 60,000 to the children of Smt. Kiron Kharukha, a very distant relation. The withdrawals for the year 1958-59 were also utilised towards theincome-tax liabilities. Even in 1958-59 his income was shown, asRs. 26,798. In this year also a gift was made by him to a daughter ofMrs. Kharukha. He had one son but no provision was made for him or hisfamily. He did not possess any experience in brokerage business. Hehad no experience of the trade. He has admitted that he has been madeas partner just as a favour.

(k) According to the capital account of the said K. A. Choudhury he contributed Rs. 3,000 and he admitted that he was not made a partner by virtue of his capital contribution but out of sheer mercy and charity. He also admitted that the gift of large sums of money to the children ofanother partner, Mrs. Kharukha, was made out of the recognition of the generosity shown by Mrs. Kharukha.

(1) Mr. Kharukha himself did not contribute any sum towards the firm's capital. He was really managing the business with his experience and influences and increased the volume of business and income from year to year.

(m) The other partner is a lady who for obvious reasons cannot in any way conduct the brokerage business.

(n) The capital amount at the end of May 31, 1957, indicates the credit balance of Rs. 46,156.

On the basis of those findings the Income-tax Officer has come to the following conclusion: 'He is just a benamidar kept content with the book accumulation only.'

8. The Appellate Assistant Commissioner accepted the said findings of the Income-tax Officer and observed that 'Sri K. A. Choudhury was merely a name-lender and could not be a real partner'. The Appellate Assistant Commissioner came to the following conclusion :

'In view of the above facts it must be held that the firm was not genuine, that Sri K. A. Choudhury was not a real partner and the claim for registration was rightly refused.'

9. The Appellate Tribunal, however, for reasons stated in its order applied the principles of law laid down in Commissioner of Income-tax v. A. Abdul Rahim and Co., : [1965]55ITR651(SC) and set aside the order of the Appellate Assistant Commissioner with the direction to grant renewal of registration to the assessee-firm for the assessment year 1958-59.

10. In my view, the Tribunal has come to the correct conclusion in the facts and circumstances of the present case. Before the Tribunal the only point argued on behalf of the assessee was that the partnership firm was held to be not genuine on the ground 'that Sri K. A. Choudhury was a mere name-lender, that is to say, he was a mere benamidar'. It was argued there by the counsel for the assessee that the question as to whether the income of Sri Choudhury was to be included in the name of Kharukhas was to be taken into consideration at the time of the assessment of the Kharukhas. It was argued, on behalf of the revenue, on the other hand, that the refusal of registration of the partnership was done by the income-tax authorities on the ground that 'no genuine firm had come into existence' and that the question whether Sri K. A. Choudhury was a benamidar for the Kharukhas or not was not relevant. It was submitted, on behalf of the department, that the facts in Commissioner of Income-tax v. A. Abdul Rahim & Co. were distinguishable inasmuch as inthat case there was no dispute as to the genuineness of the firm. Beforethis court also the learned counsel for the revenue has submitted that, onthe facts as found by the Tribunal, the principles of law laid down in thesaid Supreme Court case do not apply in all force to the facts of this case.According to him, registration was really refused not only becauseK. A. Choudhury was a name-lender and not a true partner but also thefact that the partnership firm has been set up by way of pretence in orderto escape tax. Reliance has been placed by him on the observation ofRankin J. in Sunday Singh Majithia v. Commissioner of Income-tax, [1942] 10 I.T.R. 457 (P.C.) atpages 461-462. There is no doubt that the facts in the present case arerather very ugly and it is natural to come to the conclusion that the constitution of the partnership firm and the execution of the partnership deedhave been made with the ulterior object to reduce the liability to payincome-tax. It is now well-settled that there is nothing which preventsthe assessee to take recourse to a method or device to escape tax liabilityif otherwise permissible in law. In my view, it is difficult to make a distinction between a name-lender or a benamidar. Benamidar presupposesthe existence of two persons, the ostensible owner and the real owner. Aname-lender also implies that one person has allowed his name to be usedfor the benefit of another person. Thus, in both the cases there are twoexisting persons, one of whom has legal ownership and the other has beneficial ownership. But, in addition to the fact that one is a name-lender-orbenamidar, there may be various other facts which may lead to the conclusion that the firm has been brought into existence as a subterfuge to escapetax liability. Section 26A of the Indian. Income-tax Act, 1922, only provides for the registration of a firm. Naturally, the firm should be constituted bona fide and not to use the same as a cloak to deprive the revenue ofthe State. Such a case would amount to a fraud on the statute. InCommissioner of Income-tax v. A. Abdul Rahim & Co., : [1965]55ITR651(SC) registration was notrefused only because there was a finding of fact that -the partner was abenamidar. A benamidar possesses a legal character. Benami transactionsare common in India and the word 'benamidar ' is a legal concept whichhas definite legal consequences. If a partner is a benamidar and the benamidar has executed the document as a partner in the partnership deed for thepurpose of partnership transactions and for its records, the benamidar is theperson with whom the firm is concerned although by internal arrangementbetween the-benamidar and the real owner the profits may be diverted tothe man behind the transaction, that is, the real partner. If a partnershiphas been constituted in accordance with the provisions of the Indian Partnership Act and if such partnership firm and a partner carries on the busi-ness as a name-lender the name-lender will have the legal character so far as the partnership firm is concerned. He will not only be the agent of the partners and the partnership firm but also he will be liable to the outside world on the ground that he is holding out himself as a partner to the outsiders. Thus, juristically speaking, a distinction between a name-lender and a benamidar cannot be made although the facts in different cases may lead to the conclusion that the partnership firm itself is not genuine. It is quite possible that a benamidar or a name-lender may be a fictiotious person having no office in fact and carrying on a sham transaction. In such a case the legal consequences would be different.

11. There is force in the argument of counsel for the revenue to the effect that apart from the question whether a particular person is a name-lender or benamidar the court should find out whether a partnership firm should be refused registration under Section 26A if the partnership itself is only sham and illusory one and, as such, the firm has been established or the deed of partnership has been executed only as a device to reduce tax liability. Reliance has been placed by him on the observation of Rankin J. in Sundar Singh Majithia v. Commissioner of Income-tax, [1942] 10 I.T.R 457. 461, 462 (P.C.) at page 461-462, which reads as follows :

'When a document purporting to be an instrument of partnership is tendered under Section 26A on behalf of a firm and application is made for registration of the firm as constituted under such instrument, a question may arise whether the instrument is intended by the parties to have real effect as governing their rights and liabilities inter se in relation to the business or whether it has been executed by way of pretence in order to escape liability for tax and without intention that its provisions should in truth have effect as defining the rights of the parties as between themselves.'

12. There is no doubt that Mr, Pal's argument involves an important question of law but in my view the facts of this case and the question, as framed, do not entitle him to make such submission. It may be stated here that in the said case Rankin J. immediately after the said observation has added :

'To decide that an instrument is in this sense not genuine is to come to a finding of fact; whether there was evidence upon which it was open to the income-tax authorities to come to such a decision is a question of law.'

13. In the present case the Tribunal has come to a finding that the firm is a genuine firm under the Partnership Act and its validity has never been questioned in the long history of the assessment of this firm.

14. The question should have been raised in the following form:

' Whether the conclusion of the Tribunal to the effect that the firm is a genuine firm is based on no evidence and is perverse. If the answer is in the affirmative whether the Tribunal is justified in allowing registration of the firm ?'

15. But unfortunately the findings of fact have not been challenged in this case. The document has been duly executed. The shares of the partners have been specifically mentioned and the legal relationship between the partners inter se was established. There is no finding of fact that the deed of partnership is inconsistent with the provisions of the Indian Partnership Act or the relevant rules of the Income-tax Act. It appears from the statement of case at page 3 of the paper book :

'The Tribunal held that the department had pointed out no defects in the form of the partnership or that the partnership violated any of the provisions of the Partnership Act. The firm was a genuine firm under the Partnership Act and its validity has never been questioned in the long history of the assessment of this firm.'

16. Even assuming that the refusal of registration is justifiable on the ground that the firm is not genuine the question as framed does not entitle the revenue to raise such a point in the present case. Reliance may be placed on Karam Chand Thapar & Bros. (P.) Ltd. v. Commissioner of Income-tax, : [1971]80ITR167(SC) and K. D. Kamath & Co. v. Commissioner of Income-tax, : [1971]82ITR680(SC) and also Sree Meenakshi Mills Limited v. Commissioner of Income-tax, [1957] 311.T.R. 28, 51 (S.C.).

17. Mr. Pal has also contended that the question whether a firm is genuine or not is a mixed question of fact and law. As stated earlier, the genuiness of the partnership has not been challenged as a specific question before us. The Tribunal has come to its conclusion on the evaluation of the primary basic facts and has held that the firm is genuine. There is sufficient evidence for such conclusion and unless it is pointed out that such conclusion is based upon application of wrong legal principles, the finding cannot be disturbed. The Tribunal has come to the conclusion that the firm was genuine, but one of the partners, Sri K. A. Choudhury, was merely a name-lender, that is, a benamidar and not a real partner. As already discussed above, the distinction cannot be made between a mere name-lender and a benamidar unless the facts and circumstances would show that the firm is not genuine or the finding on the genuineness of the firm has been based on wrong application of legal principles.

18. Mr. Pal has drawn our attention to two exceptions in Commissioner of Income-tax v. A. Abdul Rahim & Co., : [1965]55ITR651(SC) on which the Supreme Court did not consider it necessary to express their views on them. The Tribunal in its order has referred to the said exceptions at pages 24-25 andhas stated that neither of these eventualities are present in this case. Mr. Pal, however, has argued that there might be two cases of benamidar :

(a) where the ostensible owner is one person and the real owner is a different person.

(b) where one person has been taken into partnership with the consent of other partners.

19. In one sense I have failed to appreciate the second contingency in view of the fact that in all cases of a partnership all partners are taken by consent of each other but Mr. Pal wants to argue that the second exception referred to in this Supreme Court case is a case where one partner has been deliberately brought as a dummy or benamidar of other partners with the ulterior object of reducing tax liability. It is in that sense Mr. Pal has argued that the Supreme Court case has no application to the facts of the present case. In my view there may be logic in the argument of Mr. Pal but as the finding of basic facts and the conclusion inferred from them have not been challenged as specific questions of law, this contention cannot be accepted. In this connection reference may be made to the observation of Venkatarama Ayyar J. in Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax, [1957] 31 I.T.R. 28 (S.C.) at pages 38-39, 51.

20. Mr. Pal has also argued that Shri K, A. Choudhury is also a dummy and, as such, the principles of law laid down in Commissioner of Income-tax v. A. Abdul Rahim & Co., : [1965]55ITR651(SC) cannot be applied to the facts of the present case. He has, therefore, questioned the observations of the Tribunal in their order which reads as follows :

'Their Lordship observed that different considerations may arise in a case where the partnership is only between two persons of whom one is a benamidar of the other and in a case where the benamidar of one partner is taken as a partner with the consent of the other partners. But neither of these eventualities are present in this case.'

21. According to him, apart from the question of a partner being a benamidar or not, if on a scrutiny of all the facts it is patent that the partnership is not a genuine one, registration of such firm can be refused under Section 26A. In my view this contention cannot be accepted. A partnership is an agreement between the partners for carrying on a business with a view to earn profit. When a benamidar is accepted as a partner it is also done with the consent of other partners. If a partner is a fictitious person he cannot be called a benamidar. It is nobody's case that Sri K. A. Choudhury is a fictitious person. On the contrary, there is clear finding of fact that Sri K. A. Choudhury has paid a sum of Rs. 3,000 towards the capital of the partnership business initially. This finding of fact remains uncontradicted. It is true that instead of setting up a fictitious person, a person or a dummy may be set up in collusion and conspiracy with the other partners to reduce the tax liabilities. The income-tax authorities may in such a case refuse registration. In one sense such a person may also be called a benamidar with the consent of other partners. But in such a case there must be a finding or a conclusion that the firm is not genuine. In this particular case all the essential conditions of the Supreme Court case in R. C. Milter & Son v. Commissioner of Income-tax, [1959] 36 I.T.R. 194 (S.C.) have been satisfied. It is true that there are two significant facts which the Tribunal should have noticed in coming to the conclusion that the firm is genuine:

(a) The withdrawals for the first three years 1953-54, 1954-55 and 1955-56 were exclusively used for the payment of taxes and out of the sum of Rs. 65,533 received by Sri K. A. Choudhury in the year ending on May 31, 1956, a gift of a sum of Rs. 60,000 made to the son and daughter to Mrs. Kiron Kharuka, Sri Pradeep and Sri Chandralekha. Similarly in the year ending on May 31,1957, Sri Choudhury made another gift of a sum of Rs. 30,000 to Naintara, another daughter of Mrs. Kharuka. All these gifts were made in spite of the fact that Sri Choudhury himself has children and his financial position is such that he is not in a position to provide for them.

(b) Shri Choudhury admitted before the Income-tax Officer that all the gifts were made out of generosity by Mrs. Kharuka to admit him as a partner.

22. These facts undoubtedly give rise to a suspicion that the partnership is not genuine. But as already discussed above there are many other findings of facts on the basis of which the Tribunal can legitimately come to the conclusion that the firm is genuine; In Commissioner of Income-tax v. A. Abdul Rahim & Co., : [1965]55ITR651(SC) Subba Rao J. has made the following observation at page 656:

'In the present case the partnership was found to be a genuine one. All the formalities prescribed by the rules have been complied with. The individual shares of the partners as shown in the instrument of partnership have been specified in the application. Therefore, unless there is some legal impediment in the way of a benamidar of one of the partners being a partner of the firm, the Income-tax Officer would not be exercising his jurisdiction if he rejected the application for registration.'

23. The learned judge after taking into consideration the observation of Sir George Rankin in Sundar Singh Majithia v. Commissioner of Income-tax, [1942] 10 I.T.R. 457 (P.C.) also stated at page 657 :

' In view of the finding given by the Tribunal that the instrument of partnership was genuine, it follows that it was not executed as a preference in order to escape liability for tax, but in truth it defined the rights and liabilities of the parties between themselves.'

24. These observations of the Supreme Court at pages 656 and 657 are in pari materia with the conclusion arrived at by the Tribunal in the present case. The principles laid down in the Commissioner of Income-tax v. Abdul Rahim & Co., : [1965]55ITR651(SC) have been followed in Agarwal and, Co. v. Commissioner of Income-tax, : [1970]77ITR10(SC) and also K.D. Kamatk and Co. v. Commissioner of Income-tax, : [1971]82ITR680(SC) . Further, as stated above, the conclusion of the Tribunal to the effect that the partnership in the present case is a genuine one not having been challenged as being unreasonable or perverse, the law points argued by the counsel for the revenue do not have any application to the facts of the present case. Even assuming that genuineness of a partnership firm is mixed question of law and fact, in my view the inference drawn by the Tribunal is a possible inference inasmuch as Sri K. A. Choudhury has been held to be a ' name-lender', not a real partner and, as such, a benamidar for all practical purposes for one or both the partners. But, as discussed above, unfortunately the primary facts have not been challenged by the revenue and, as such, the contention of the learned counsel for the revenue cannot be accepted. Reliance may also be placed on Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax, [1957] 31 I.T.R. 28 (S.C.), Karam Chand Thapar & Bros. P. Ltd. v. Commissioner of Income-tax, : [1971]80ITR167(SC) and Karnani Properties Ltd v. Commissioner of Income-tax, : [1971]82ITR547(SC) .

25. For all the reasons stated above the question is answered in the affirmative and in favour of the assessee. There will be no order as to costs.

A.N. Sen, J.

26. I agree.


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