TMI Blog1995 (6) TMI 91X X X X Extracts X X X X X X X X Extracts X X X X ..... ontinuation of registration for Assessment Year 1980-81. 4. Subsequently the Assessing Officer noticed that there were two agreements or contracts with regard to the cinema halls known as Jamshedpur Talkies and Karim Talkies at Jamshedpur. The two cinema halls were being run by M/s Karimia Trust. On 3-1-1978 there was an agreement between M/s Karimia Trust, Jamshedpur and M/s. Kapoorchand (P.) Ltd., Calcutta, according to which, M/s. Karimia Trust agreed to rent out the two cinema halls to M/s Kapoorchand (P.) Ltd. on weekly theatre hire basis. The rent was fixed at Rs. 6,000 weekly payable by M/s Kapoorchand (P.) Ltd. to M/s Karimia Trust. 5. In this agreement, M/s Karimia Trust agreed to incur certain expenses, which were related to ownership of the premises such as renewal of the licence, payment of municipal taxes, insurance for building, furniture and machineries. However, the running expenses were payable by M/s Kapoorchand (P.) Ltd. such as, payment of entertainment tax, show tax, repairs of building, machineries, furnitures, etc., staff salary, electric charges, cost of carbons, stationery costs etc., Bihar Amusement Tax. There was a clause, according to which, the perm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the agreements were a subterfuge to reduce the incidence of tax by this device. The two agreements were stated to be not genuine but sham transactions. He also stated that there was no change in the management of the two talkies and all the employees including the Manager remained the same. 7. Thereafter, the Assessing Officer stated that both the partners were merely benamidars of M/s. Karimia Trust and this fact was known to both the them. Such knowledge or belief had not been communicated by either of the partners to the Income-tax Officer in the prescribed manner. It followed that there was never a genuine firm in existence and he, therefore, proposed to cancel the registration. 8. We may notice at this stage the provisions of Explanation below section 185 of the Act as it stood at the relevant time : " Explanation - For the purposes of this section and section 186, a firm shall not be regarded as a genuine firm if any partner of the firm was, in relation to the whole or any part of his shares in the income or property of the firm, at any time during the previous year, benamidar. (a) ** ** ** (b) of any person, not being a partner of the firm, and any of the other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt and control of the assessee firm remained with M/s. Karimia Trust through its Trustee, Shri S.M. Shafiq. The ITO had given reasons in the show-cause notice for holding the partners of the firm as benamidars of the M/s. Karimia Trust. These findings could not be disputed before the AAC. The order of the ITO was, therefore, upheld. The assessee is now in appeal before us. 12. The ld. counsel for the assessee took us through the order under section 185 for Assessment Year 1979-80 granting registration and the assessment order for Assessment Year 1980-81 granting continuation of registration and emphasised that the partners have been examined when the registration was granted and there was no further request by the Assessing Officer at any stage after the issue of show-cause notice under section 186(1) to produce the partners again. He stated that it is difficult to see how any finding of a sham transaction or benami transaction could be given without ascertaining the facts from the partners directly. He also submitted that the income had been assessed in the hands of the assessee substantially and not on protective basis. Tax had also been paid. This was inconsistent with the Dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and in the circumstances of the case, the claim of the assessee trust for exemption of its income from taxability was hit by the provisions contained in section 13(1)(c)(ii). Our attention was invited to para 14 of the decision, which is reproduced below for convenience : " 14. With regard to question No. 2, the factual controversy and the factual data required to be considered are elaborately stated in the two orders passed by the ld. Members. After hearing the representatives of both the sides, I am inclined to agree with the view expressed by the ld. Judicial Member, the view expressed in favour of the assessee. It is an admitted position that section 13(3) is not applicable to M/s. Kapoorchand (P.) Ltd. who have taken on hire two chinema houses and, therefore, the income earned by M/s. Kapurchand Pvt. Ltd. is not to be considered as income diverted to prohibited persons mentioned in section 13(3). I also do not find any material on the basis of which it can be said that M/s Kapurchand Pvt. Ltd. were obliged further to give on hire these two cinema houses to a firm in which relatives of the trustees were interested. M/s. Kapurchand Pvt. Ltd. had free will either to run the cin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to a letter dated 2-3-1984 from the ITO to the assessee that the assessee's case had been fixed for hearing under section 263, on 7-3-1984 at the CIT's Camp Office at Jamshedpur for Assessment Year 1979-80 and 1980-81. He informed the Bench that limitation was available till 31-3-1984 only but no order under section 263 was passed. This also showed that the Department was satisfied with the income disclosed by the assessee. 17. For the abovereasons, it was stated that the order under section 186(1) should be cancelled. 18. The ld. D.R., on the other hand, relied strongly on the order of the AAC. He submitted further that diversion of the income of M / s. Karimia Trust under section 13(1)(c), which was the subject-matter of the Tribunal's order, extracted above, was not material to the assessee's case. This was a clear case of subterfuge where ration laid down by the Supreme Court in the cases of Mc Dowell Co. Ltd v. CTO [1985] 154 ITR 148 as well as Sree Meenakshi Mills Ltd's case were fully applicable. He submitted further that the procedure laid down in section 186(1) had been followed and opportunity had been given to the assessee as provided therein. It was not a require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chandi Prasad v. CIT [1971] 79 ITR 553 (Pat.) ; and 3. CIT v. Durga Prasad More [1971] 82 ITR 540 (SC). 22. For the above reasons, the ld. D.R. stated that the order under section 186(1) should be confirmed. 23. We have considered the rival submissions carefully. Two reasons have been given in the order under section 186(1) for cancelling the registration. The first reason is that the agreements between M/s. Karimia Trust and M/s. Kapurchand (P.) Limited and also between M/s. Kapurchand (P) Ltd. and M/s. Ruhee Enterprises were sham or bogus transactions and not genuine transactions. In the result, the entire income actually belonged to M/s. Karimia Trust and it had actually been assessed in its hands in its assessment orders. The second reason it that the two partners of M/s. Ruhee Enterprises, Mrs. Shamsun Nisa Begum and Syed Ashfaque Karim were wife and son respectively of the Managing Trustee, Syed Mohamed Shafiq of Karimia Trust and were actually benamis of M/s. Karimia Trust. In the regard, evidently, Explanation (b) below section 185(1) of the Act has been invoked, according to which, for the purpose of section 186, a firm shall not be treated as a genuine firm if any p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in its books showing the sale of these very bales to A for Rs. 20,000 which will be about the cost price and in the books of A these goods will be shown as sold by it to X for Rs. 50,000. If the sale by the company to A and the connected sale by A to X were genuine, the company would have made no profit on the sale, whereas A would have made a profit of Rs. 30,000 on it. But in fact, both these sales were sham transactions, the only sale that took place was that by the company to X and the price actually received by its was not Rs. 20,000 but Rs. 50,000. As a result of these paper transactions and manipulation, the profits of Rs. 30,000 made by the company was suppressed. This process was reversed when the company purchased cotton. The appellant purchased, let us say, 100 bales of cotton from X for a price of Rs. 5,000 and paid that amount to X. Neither this purchase from X nor the payment of Rs. 5,000 to him would appear in the books of the company. Instead, the books of A will show these goods as purchased by it from X for Rs. 5,000 and the books of the appellant will show a purchase from ' A ' of those very goods for Rs. 8,000. Both these sales were fictitious, the only real tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per week, then it could be said that the facts were similar to the facts in the case of Sree Meenakshi Mills Ltd. However, this was not so. In the agreement, between M/s. Kapurchand (P) Limited and M/s. Ruhee Enterprises, only day-to-day management was handed over to M/s. Ruhee Enterprises. M/s. Kapurchand (P) Limited did not receive any fixed weekly amount from M/s. Ruhee Enterprises. On the other hand, they paid Rs. 10,500 per week to M/s. Ruhee Enterprises for meeting the day-to-day management expenses, such as the entertainment tax, show tax, repairs to buildings, machinery and fixtures, salaries to staff, electricity charges, Bihar Amusement Tax it is significant that the income from the shows continued to go to M/s. Kapurchand (P) Limited except for morning shows and income from advertisements which went to M/ s. Ruhee Enterprises. 28. We also find some weight in the contention of the ld. counsel for the assessee that there was valid reasons for the above arrangements when he submitted that the entire film distribution of the Eastern Region was situated at Calcutta and M/s. Karimia Trust, in order to feed weekly programmes to its two cinema halls, had to visit Calcutta freq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inema halls on their own or to exploit the hired property in any manner it liked. It was also observed that the grant of sub-lease to M/s. Ruhee Enterprises, in which relatives of the Trustee were interested, can also be a precaution to preserve and to protect the Trust property from the adverse claim that might be apprehended in the present day circumstances and which might be put up by the lessees who are not in any way associated with the Trustees. It was further observed that it was not relevant that one of the two partners of M/s. Ruhee Enterprises was a lady and it was not known whether one or both of the partners possessed any special qualifications. It was not denied that they did engage themselves in attending to the business and devoted item and energy and also undertook the incidental risk that is normal in running a business of any type. The ld. 3rd Member did not attach any importance to the fact that the management and control was fully in the household of the Trustee. 32. In view of above, we hold that the Department has not made out any case that the two agreements in question were sham transactions. On the other hand, the observation of the ld. 3rd Member, mentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this case, the firm was held to be not a genuine one independently, and the found new partners being benamidars was no bar to registration. The Supreme Court confirmed the refusal of registration. Thus the facts as well as the law were quite different from those in the present case and, therefore, the decision does not help the Department. 34. We will also look into the cases relied upon by the ld. counsel for the assessee. In the case of Prakash Narain there were purchases of properties and the question arose whether they were benamis. After reviewing a series of case laws it was held that the burden of proof was on the Revenue to show that the transaction was benami. No absolute formula or acid test can be laid down but generally the cases are guided by the circumstances as under---- (i) source from which the purchase money came ; (ii) nature and possession of the property after purchase ; (iii) motive, if any ; (iv) the position of the parties and the relationship between the claimant and the alleged benamidars ; and (v) the custody of the title-deed after the sale. 35. It was observed that the above list is not exhaustive and its efficacy varies according to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this partnership were included in the income of the assessee-company on the ground that this partnership was a benami or a sham concern. There was nothing to show that the moneys of the partnership were drawn by any one except the daughters themselves or any one other than the daughters. Profits were apportioned amongst the partners in the books. It was held that the burden was not on the assessee but on the Department to prove that what was apparent was not real both in case of benami or sham. In this particular case it was held that the burden had not been discharged. This case helps the assessee. 39.In case of Kirana Traders facts were different. In that case, the Income-tax Officer did not form an opinion that there was, during the previous year, in genuine firm in existence and, therefore, it was held that the cancellation of registration Linder section 186(1) was not valid. This case does not help the assessee because in the present case the Assessing Officer did form an opinion that there was no genuine firm in existence. 40. In case of Dhaniram Gupta Co. it was held that registration could not be cancelled under section 186(1) merely because there were internal arrang ..... X X X X Extracts X X X X X X X X Extracts X X X X
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