TMI Blog1986 (3) TMI 132X X X X Extracts X X X X X X X X Extracts X X X X ..... m any place inIndia. There is not even any offence inIndiafrom which it could have transacted any business. There is no income earned inIndia. Similarly, there is no expenditure incurred inIndia. The assessee-firm does not have any assets or liabilities inIndia. These and other facts placed on your record in assessment year 1977-78 are equally applicable to the facts of this year also." 3. The affidavits of the partners and the certificates from some of the Indian parties with whom the assessee-firm had dealt with were relied upon this year also. With regard to the observation of the ITO that the certificates were all couched in the same language, the assessee had the following to say : "... you have raised a further point that the certificates filed by the assessee-firm are similar in language. We accept this position. It was at our request that these persons gave these certificates to be filed with you. The nature of the certificates to be given to you and its language etc. was written by our counsel so as to meet your requirements to the best of the understanding of our counsel." 4. The following was the information regarding the various partners' stay inKabulandIndiadurin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that India based partners took no share in the control and management of the affairs of the firm, given in respect of the assessment year 1977-78, hold good for this year also. It is true that the seized material does not pertain to the present assessment year, but, to the assessment years 1976-77 and 1977-78, but the indicates the pattern of management, which has its own continuity. There is nothing to show that this year the pattern of management was different. Besides, the assessee withheld the relevant correspondence for the year under consideration. An adverse view of this action has, therefore, to be taken. 7. The learned Commissioner (Appeals) has stressed in his order and in our opinion rightly the fact the assessee-firm is constituted under the Indian Partnership Act, 1932, atDelhiand is subject to the provisions of Indian Arbitration Act. It has been, the position right from the assessment year 1957-58 onwards, after the partition of the family business of S. Hukam Singh, partnership was formed regardingKabulbusiness in the name and style of assessee-firm. All the partners of the firm are resident inIndiaand have their residence inDelhi. Even when the firm was dissolv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee deserves to be accepted Late Shri Dwarka Nath was a person of means, and loan of Rs. 1,75,000 out of that of Rs. 2,50,000 has been accepted by the learned Commissioner (Appeals) as genuine. The explanation given by the assessee appears to be plausible. There was, therefore, in our opinion, no justification to add the aforesaid sum of Rs. 75,000 to be assessee's total income. The addition is accordingly deleted. 13. The ground regarding langar expenses was not pressed by the assessee. 14. In the result, the assessee's appeal stands partly allowed. IT Appeal No. 1383Delhiof 1982 : 15. In the departmental appeal, the first issue is regarding the scope of the order of the Commissioner (Appeals) dated3-2-1979by which he sent back the matter to the ITO. The assessee has preferred original appeal on several grounds including, inter alia, the question of status. The learned Commissioner (Appeals) restored the matter back to the ITO for redetermining the question of status. With regard to other grounds of appeal, he expressed no opinion. The relevant directions of the Commissioner (Appeals) were couched in the following language : "Hence it is necessary for the ITO to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2) to reduce it, or (3) to enhance it, or (4) to annual it, or (5) to set aside the assessment and 'refer the case back to the ITO for making a fresh assessment 'in accordance with the directions given by him and 'after making such further enquiry as may be necessary'. In the present case, the Commissioner (Appeals) adopted the course indicated in item (5) above. His order of 'set aside' could, therefore, be only 'for making a fresh assessment'. He could not withhold the power of adjudicating on other grounds, and yet aside the assessment under section 251. He could, of course, retain the appeal with him, remand the matter of status to the ITO for enquiry and report, and then determine the appeal in its totality on all grounds. Such an order would be an interim order, in terms of section 250(4) of the Act and would not be deciding the appeal finally. But, in the present case, the Commissioner (Appeals) has not passed such an order. He passed the final order under section 25(1) (a) and, thereafter, became functus officio with regard to the said appeal. He chose to express no opinion on other grounds of appeal, as in his opinion, it might not be necessary to adjudicate upon t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed the order under section 251, thereby finally disposing of the appeal. He seemed thereafter to be in seizin of the appeal. The question of other grounds of appeal remaining in suspended animation, so to say, in the meanwhile, did not arise. The appeal of the department on the first ground, is therefore, hereby allowed. 19. The next grievance of the revenue is against the deletion of the addition on account of trading results. The assessee disclosed a gross profit rate of 6.7 per cent this year as against the gross profit rate of 10 per cent in respect of the assessment year 1976-77. The ITO pointed out that the purchases of dry fruits, etc., fromKabuland assessee's sales there were not vouched and there was no satisfactory explanation regarding such decline. He, therefore, rejected the trading results. At the time of original assessment, an addition of Rs. 1,50,000 was made to the trading results, which was increased to Rs. 6,50,000 in the course of reassessment after a set aside. The Commissioner (Appeals) did not approve of : (1) the enhancement of the addition from Rs. 1,50,000 in the original assessment to Rs. 6,50,000 in the course of reassessment, as, according to him, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Singh amounting to Rs. 5 lakhs and the interest allegedly paid to him amounting to Rs. 5,750. Copy of account of S. Sarin Singh appears at page 17 of the assessee's paper book. From a perusal thereof it appears that the peak credit in the above account is of Rs. 3 lakhs only, as below : Rs. 9.6.1974 1,00,000 25.6.1974 2,00,000 -------- 3,00,000 -------- The said amounts were returned (or withdrawn from the cash book) as below : Rs. on 10.7.1974 1,00,000 3.10.1974 2,00,000 Thereafter, on26-1-1975Rs. 2 lakhs were again shown as having been borrowed from him on26-1-1975, which was returned on25-2-1975. The sum allegedly borrowed on26-1-1975, thus stands covered by the earlier withdrawals of Rs. 3 lakhs on10-7-1974and3-10-1974. So, the effective cash credit to be explained in the present case is Rs. 3 lakhs and not Rs. 5 lakhs. 24. The ITO added the said amount on the ground that no satisfactory explanation as to the nature and so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er sides for the assessment year 1977-78. For the reasons given by us for the assessment year 1977-78, which apply, mutatis mutandis, for this year also, we hold that the assessee-firm was a resident during the accounting period under consideration. All the partners have been inIndiasimultaneously for 137 days; two partners were here all along during the previous year. Shri Narinder Singh was in fact inIndiafrom1-1-1977to26-2-1977, i.e., almost six months continuously. It cannot, therefore, be said that control and management of the assessee's affairs was wholly outsideIndiaduring the previous year. From the letter of Shri Narinder Singh dated10-3-1984, it is clear that it was not the records regarding bookings, correspondence, etc., were not all maintained. According to him 'whatever records were maintained' were in the loose form and that the same had been destroyed in the last disburbances inKabul. It may be so. But, as was pointed out by the learned Commissioner (Appeals) in his order for the assessment year 1977-78, the correspondence had the Indian end also. IfKabulpart was destroyed, the same could not be said about the Indian end. TheIndiabased partners could have produced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this ground. In the result, the department's appeal stands rejected. Per Shri Anand Prakash, Accountant Member - Both these appeals pertain to the assessment year 1977-78. They were heard together and are being disposed of by a combined order for the sake of convenience. IT Appeal No. 1571 (Delhi) of 1982 is by the assessee whereas IT Appeal No. 2747 (Delhi) of 1981 is by the revenue. The first ground of the assessee is with regard to its status. According to the assessee the correct status of the assessee-firm was that of non-resident and, therefore, no income of the assessee accrued and arose inIndia and was assessable to Indian income-tax. 2. The facts and circumstances surrounding the above controversy may be noted. The assessee is a firm consisting of the following person as its partners as on1-4-1975: 1. Sardar Swinder Singh 25 per cent 2. Shri Inder Mohan Singh 25 per cent 3. Shri Rajinder Singh 10 per cent 4. Shri Narinder Singh 40 per cent 3. Prior to1-4-1975the firm consisted of the partners, namely, Swinder Singh, Inder Mohan Singh, Surbir Singh and Narinder Singh with the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Foreign Trade in the Gazette of India dated29-3-1972. In terms of the said agreement of the assessee is obliged to balance its imports intoAfghanistanby its exports toIndia. The scope for business on arhat basis or sending goods on consignment fromKabultoIndiaor fromIndiatoKabulis not there under the new scheme. 6. The assessee-firm filed its first return of income for the assessment year under consideration on30-3-1978, declaring its income at Rs. 1,74,531 in the status of a 'resident'. Subsequently, on17-5-1978a revised return was filed by it, claiming the status as 'non-resident', and consequently, declaring the total income at nil. Prior to this date, the assessee had been declaring its status as residents in all the returns filed by its from the assessment year 1957-58 onwards up to the assessment year 1976-77. In respect of the assessment years 1973-74 to 1975-76 the assessments had also been completed accepting the assessee's status as 'resident' as per its declaration. With regard to the assessment for the assessment year 1976-77, however, he assessee filed a revised return on17-5-1978on the pattern of the assessment year 1977-78, claiming its status as non-resident, bec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ried on inAfghanistanwhich was seat of management and control. There was no asset or liability of the firm inIndia. There was no rented premises of the firm inIndiafrom where it could have functioned. In view of these facts, it may be submitted that the assessee-firm was a non-resident firm and not liable to tax inIndia. 4. It may also be pointed out that there are four partners of the assessee-firm, namely, Shri Narinder Singh 40 per cent, Shri Swinder Singh 25 per cent, Shri Inder Mohan Singh 25 per cent and Shri Rajinder Singh 10 per cent. It may, thus, be noted that the main partner in this firm is Shri Narinder Singh, who was staying inKabuland controlled the business from there. Booking of business was also done fromKabul. The assessee-firm did not carry on any business fromIndia. No correspondence was exchanged fromIndiain respect of its business. 5. It may be pointed out that imports and exports were made by the assessee-firm on principal to principal basis under the bilateral agreements between Indian andAfghanistanon the basis of which only barter trade was carried on between the two countries. It may be pointed out that there was no export by the assessee-firm intoIn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso filed certificates from the following parties. : Name of party Date of the certificate Rawal Industries (P.) Ltd. 12-10-1979 Narinder Singh Co. 12-10-1979 Surbir Singh Co. 12-10-1979 Hukam Singh Swinder Singh 12-10-1979 S. Inder Mohan Singh, Amritsar 12-10-1979 Harcharan Singh 11-10-1979 Joginder Singh Rajpal 12-10-1979 9. The affidavits of the three partners referred to above are more or less identical in language and state, inter alia, as follows : "2. The above-named firm of Hukan Singh Inder Mohan Singh (Kabul) was carrying on its business in the above accounting year wholly inAfghanistanand was not carrying on any business whatsoever inIndiain the above-mentioned years. Purchases were made by that firm from parties inIndiaand sales were made by that firm to parties inIndiaon principal to principal basis in accordance with the provisions of the Indo-Afghanistan Barter Trade Agreements as in force in those years. There was no purchase by the above firm inIndia. Similarly there was no s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid letter of the ITO, vide his letter dated4-3-1980. Along with this letter, the assessee-firm enclosed the certificates from various parties, referred to above as corroborative evidence. It also contended in it that merely because the partners of the firm were resident inIndiaand the firm Narinder Singh Co. was resident inIndia, it would not mean that the assessee-firm was also controlled and managed fromIndia. The firm also required the ITO to give inspection to it of the seized material to which reference had been made by him. 13. Another letter was written by the assessee-firm to the ITO on17-3-1980, wherein it stated that no order book was being maintained by the assessee-firm. 14. Partners Shri Swinder Singh and Shri Rajinder Singh were examined by the ITO on oath on18-3-1980and22-3-1980, respectively. During the course of examination of Sardar Swinder Singh, seized papers, to which reference was made by the ITO in his letter dated26-2-1980, were shown to him and his replies thereto were solicited. There were two invoices to issued by theKabulfirm in the names of R. D. Motors,Delhiand Janak Engg.,Amritsar. After examining the said invoices, Shri Swinder Singh stated th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tner was as below : "I have not written any letter to Hukam Singh Inder Mohan Singh,Kabulregarding Hukam Singh and Inder Mohan Singh and as such I need not reply to the rest of the question." The assessee-firm's counsel cross-examined the aforesaid partner and asked him, inter alia, the following question : "Are you entitled to operate upon the firm's bank account inKabulwith Bank Milly?" The partner's reply was : "I cannot say, I do not remember." On being asked as to where the records ofKabulfirm were maintained, the partner said that they were maintained inKabuland not inIndia. He further stated that he had never signed any document on behalf ofKabulfirm, while inIndia. 16. On the basis of the above evidence, the ITO rejected the assessee's claim with regard to its status. As some additions were also proposed by him to the income of the assessee-firm, exceeding Rs. 1 lakh, the draft order proposed by the ITO was referred by him to the IAC on being objected by the assessee under section 144B of the Act. From the order of IAC passed under section 144B, it appears that the IAC had asked the assessee by his letter dated21-5-1980to produce its correspondence with the In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us for this ... ... the caustic soda in DCM is ready and can be despatched as and when required ... .... theAmritsarsuggests that green pata should not be purchased for 10/20 days because due to rains it gets heavy and on reaching atKabul, the weight will be very less." Letters dated6-8-1976and9-8-1976may also be noted at this stage as below : "Letter dated6-8-1976 Just now spoke to B. R. Malhotra atCalcutta. Purchased 300 sitara at the rate of 12.80. We are informing you about the same by telegram also." "Letter dated9-8-1976 Please note that 14 bags of Almonds have been damaged very badly due to rain water. Pista Dadi has also been affected which we have sent at home. Please take up the matter with the clearing agent atLahoreas to how the goods have been damaged ...." According to the IAC the above extracts clearly show the participation of Shri Inder Singh in the affairs of the assessee and Shri Inder Mohan Singh is a partner who is also resident inIndia. He further pointed out as below : "For an effective management and control, it is very necessary that detailed information is called and examined and instructions issued. The seized material has file marked S- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was all the more necessary for the resident partners of the firm to exert to look after the interest of the firm in this regard in India. According to him in a trading concern purchase operations are as important as sales and, unless these purchases were properly supervised inDelhifor being exported toKabul, the assessee-firm could incur loss. Therefore, the resident partners of the firm cannot but look after the interest of the firm. 3. That Shri Narinder Singh was inIndiabetween31-3-1976to31-3-1977and Shri Ranjinder Singh, the other working partner also remained inIndiathroughout the previous year and that, therefore, the control and management of the firm could not but be fromIndiaduring the previous years in question. 19. The assessee appealed to the Commissioner (Appeals) against the aforesaid finding of the ITO. The Commissioner (Appeals), after prolonged hearing and perusal of the papers filed by the assessee and the case records, confirmed the order of the ITO, more or less for the reasons as given by him. While doing so, he made certain observations, which may be noted in the passing. In paragraph 3 and 4 of his order, the Commissioner took note of the payments of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hey were not acting in their second incarnation as partners of theKabulfirm when they were arranging for the import of dry fruits fromKabuland arranging for export of kiryana, malmal, etc., fromDelhi." 20. Referring to the failure of the assessee to produce correspondence file before the authorities below the Commissioner (Appeals) had the following observations to make : "The IAC has given many other examples of such letters written by partners inIndiato various parties inIndiain connection with the export of goods to match import of dry fruits. The appellant on the other hand has wilfully withheld all the evidences which would have some light on the participation of the partners inIndiain the affairs of the firm. They have thus admitted that order for various items which were required inKabulwere placed by theKabulfirm. Even if there was no regular order booked inKabul, the appellant has itself admitted that the requirements were communicated either by 'telephone, telegram, letterheads or slips'. The appellant has not produced one telegram or slip or a letter received fromKabulfirm which would indicate that at a particular time malmal or green tea was required inKabul. The le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad been the dealing inIndia. According to the learned counsel for the assessee, the aforesaid statements and affidavits had been allowed by the authorities below to remain unchallenged, and as such it was not correct for the authorities below to have rejected them as self-serving statements. If the authorities below had any doubt with regard to the correctness of the statements made in the aforesaid affidavits and certificates, it was open to them to have question the affidavits or certificates in question by way of cross-examination. Once the authorities below did not choose to do so, the statements in question should be believed, and if this be so, the assessee had discharged the onus, which lay on it of proving that the assessee-firm had no business inIndiaand that its management and control was situated wholly outsideIndia. In support of the above proposition, the assessee relied upon the decision of the Hon'ble Allahabad High Court in the case of L. Sohan Lal Gupta v. CIT [1958] 33 ITR 786, wherein their Lordships have held that the Tribunal was not entitled to reject the affidavit filed by the assessee on the mere ground that he had produced no documentary evidence; and that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtners went out of the said firm and the firm's entire business was ultimately taken over by Sardar Narinder Singh. This showed that Sardar Narinder Singh was the main the partner having control and management of the firm. The presumption of the authorities below the part of the management and control of the assessee-firm vested in the partners residing in India because they controlled 60 per cent share of the profit of the firm was totally imaginary and without any factual basis and ignored to take into account the realities of the situation, viz., that Sardar Narinder Singh was controlling the affairs of the firm and ultimately he took over the firm's business on 31-3-1978. 24.4 No evidence whatsoever has been placed, according to the learned counsel, on record by the revenue to show that there was some control and management of the firm withinIndia. It was true that the addresses of the firm was given as 517, Katra Iswara Bhawan,Delhibut that was only for the sake of convenience. The firm paid no rent for it and had no room to itself in it. There was no liability or asset of the firm situated inIndia. The assessee did not maintain any car inIndianor any expenses were incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rein their Lordships have explained as to in what circumstances it could be said that the control and management of the affairs was wholly situated outsideIndia. All the evidence, according to the learned counsel, in the present case, went to show that the control and management of the affairs of the firm was situated inKabuland, therefore, it would be wrong to hold that the management and control of the affairs of the firm was not wholly situated outsideIndiaand the firm was non-resident. 25.1 On behalf of the revenue the aforementioned submissions of the assessee are resisted and reliance is placed on the orders of the authorities below. It is in particular pointed out that the onus to prove that the assessee-firm's management and control was situated wholly outsideIndiawas on the assessee-firm, as per the decision of the Hon'ble Supreme Court in the case of v. VR. N. M. Subbayya Chetiar wherein their Lordships have explained the provisions of clause (b) of section 4A of the Indian Income-tax Act, 1922 (analogous to the provisions of section 6(2) of the 1961 Act) and have pointed out that normally an HUF (firm is in the same category as an HUF for the purpose of this section) w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... who were based in India would take no part in the running of the business of the firm. No such evidence was, however, placed by the assessee on the record. On the contrary, one of the partners, who resides inIndianamely, Shri Rajinder Singh has been admitted avowedly as a working partner. He never went out ofIndiaduring the previous year under consideration. How can it be then said that he worked for the firm outsideIndiaonly ? It is not the firm's case that he is not a working partner of the firm and that he had ceased to be the working partner during the year under consideration. 25.3 The argument of the assessee that the partners in India might have taken interest in the business, which touched the business of the assessee-firm also, but they did so as partner of Hukum Singh Swinder Singh, who were exporting goods to the assessee-firm in Kabul, was according to the learned departmental representative, a mere play of words. Such partners have as much interest in the profit earning capacity of the assessee-firm as of the firm Hukum Singh Swinder Singh, and to allege that they worked only for the Indian firm and did not work for the assessee-firm would not be in accordance with h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Chowkchand Balabux v. CIT [1961] 41 ITR 465 wherein their Lordships have held, inter alia, that, if proper reasons were given for rejecting the affidavits, which were not illegal or perverse, the affidavits in question could be rejected. According to the learned departmental representative, therefore, the learned Commissioner (Appeals) had rightly rejected the affidavits of the partners, which were no more than self-serving statements and were, in any case, contradicted by the evidence discovered in the search and as record by the ITO in his assessment order. 26. In the rejoinder the learned counsel for the assessee reiterated his earlier submissions and submitted that the onus, which lay on the assessee, had duly been discharged, and thereafter it is for the department to prove its case that the management and control of the affairs of the firm was not wholly situated outsideIndia. It having failed to do so, the assessee must succeed. 27. We have given careful consideration to the facts of the case and the rival submissions. The question of residential status of a firm has to be determined with reference to clause (2) of section 6 which reads as below : "(2) A Hindu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the presumption will not be dislodged. It will also be the position, when the evidence led by him is not sufficient to discharge the onus. The above position in law is well settled by now by a series of decisions and it will be enough if we refer to the following decision of the Hon'ble Supreme Court in this connection - v. VR. N. M. Subbayya Chetiar's case, Erin Estate's case and Nandlal Gandalal's case. 29. (a) In the present case the assessee has claimed the status of non-resident and so onus was on it to show that the control and management of its affairs was situated wholly outsideIndia. The firm has led the following evidence to discharge the above onus. It has (1) filed affidavits from three of its partners, namely, Swinde Singh (25 per cent), Inder Mohan Singh (25 per cent) and Rajinder Singh (10 per cent), who have been in India for almost the entire year (barring 10 days in the case of Swinder Singh, when he was in Kabul), deposing that they did not take part in the control and management of the affairs of that firm while in India. Secondly, it was filed certificates from several persons, with whom it has had business dealings in India stating that they dealt with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of these letter, discovered in the course of a search belies the contents of the affidavits of the partners. Apart from these letters many bills and invoices pertaining to the Indian customers issued by the assessee-firm fromKabulwere found in the custody of the India-based partners at the time of the search. If the partners inIndiatook no part in the affairs of the firm, as alleged, why should these bills be with the partners inIndia? The existence of the bills, coupled with the correspondence referred to above, clearly establishes the active nature of the interest that the partners inIndiahave been taking in the firm's business, and why not ? Purchases funning into millions of rupees were being done fromIndia. To supervise the quality of the goods and the competing price thereof, to decide from whom the purchase and what to purchase, to keep an eye on the fluctuating prices of various commodities in India and to decide the timing to purchase the goods, the keep liaison with the Reserve Bank of India, customs authorities, customs check-posts, etc., are numerous functions, which have to be attended to in India on behalf of the firm in the normal course. Who will do this, when the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h have been found to be working and controlling and guiding the purchase operations inIndia, and even imports intoIndiaas per evidence referred to above. The withholding of the correspondence by the assessee-firm emanating from the partners residing inIndiaand the office inKabulalso compels the drawing of an adverse inference against the assessee on this point. Then S. Narender Singh has also been inIndiafor about 180 days during the previous year under consideration from1-4-1976and26-6-1976and1-1-1977to31-3-1977. His visit toIndiawas not a casual or personal one, say, to marry a son or daughter. It is not the assessee's case that, while coming to India he had granted power of attorney in favour of someone in Kabul to control and manage the affairs of the firm. True, there were employees inKabul, who run day-to-day business of the firm. But it does not tantamount to control and management of the affairs of the firm. That control could be exercised by partners alone and, during the previous year under consideration, all the partners had been in India-two for whole year, one for 354 days and S. Narender Singh for 178 days. During this period of 178 days, when all the partners were in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he India-based partners otiose and incapable of taking any interest in the affairs of the firm. We fail to see any alchemy of the type suggested. There is nothing inherent in the system to exclude the partners from participating in the management of the affairs of the firm. The partners could, of course, could consciously decide not to participate in the affairs of the firm. But there is no evidence to show that such deliberate decision was taken by them. Whatever little evidence had been allowed to trickled into (despite the assessee's attempts at total withholding of the necessary evidence in the form of correspondence) as a result of the seizure of some letters in the search of India-based partners goes to show that no such decision was ever taken and all the partners were not only entitled to participate, but did participate in the affairs of the firm. In fact the firm has also been impliedly admitting that the other three partners also participate in the management of the affairs of the firm, when it is averred that, 'as and when their participation was required, the other partners also go and participate in the management inKabul'. No reason or justification has, however, bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tners were in India (for 10 days in April in 1976, Sardar Swinder Singh was Kabul, while S. Narender Singh was in India. These ten days are, therefore, excluded from 178 days that S. Narender Singh was inIndia). During the remaining days, he was partly inIndiaand partly inKabul. It is, therefore, not possible to hold that the management and control of the affairs of the firm was wholly outsideIndiaduring the previous year. 36. The assessee's plea that the assessee's business in entirely in Kabul, that in India there has been neither purchase nor sale, that there are no liabilities in India nor any assets, has been disputed by the ITO, who points out that most of the assets of the assessee are in the form of trade debts and they are in India. Then, the purchase are fromIndiaand they could not be made without the active participation and help of India-based partners. These factual aspects apart, the assessee's contention that the firm is non-resident because the entire business inKabul, because all the transactions are done there and the books are also written there, does not bear a moment's scrutiny. It is well to remember that what we have to ascertain is the status of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heir Lordships of the Madras High Court that there was nothing to show that any part of the control over the firm was exercised from India and that, therefore, the Tribunal had rightly concluded that the assessee should be assessed as a non-resident, because the management and control of the assessee was wholly outside India during the relevant accounting period. 40. When we compare the facts of the above case with the facts of the present case, we find no similarity between them. In the present case S. Narender Singh is not designated as managing partner of the firm. On the contrary, the relevant clause of the partnership deed envisages every partner to take interest in the business of the firm and one of the partners was in fact taking interest only as a working partner and he had contributed no capital. Apart from it, Shri Narender Singh was not inIndia, as noted earlier, for a personal reason of, say marrying a daughter as was in the case of S. While coming toIndia, he had not delegated the power of attorney in favour of anybody to manage and control the affairs of the firm inKabul. No other partner went toKabulduring his absence there to manage the affairs of the firm as hap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed up and in the other case the amounts had been carried over to the next year. The learned Commissioner (Appeals) in the circumstances felt that the assessee had not discharged the onus, which lay upon him of proving the cash credits. 43. The assessee assails the above concurrent finding of the authorities below, and, so far as the question of presenting the said creditor before the ITO was concerned, it is stated that the same was not possible as the creditors were inKabul. The genuineness of the said creditors, had been proved by getting the signatures attested by the Indian Chamber of Commerce. The amounts in question should, therefore, be accepted. On behalf of the revenue the order of the learned Commissioner (Appeals) is supported. 44. In our opinion, there is merit in the observations of the learned Commissioner (Appeals) that, even though the genuineness of the existence of the creditors might be established by the attestation of the signatures by the Indian Chamber of Commerce that did not prove the credit-worthiness of the creditors, and that for accepting the cash credits in question it was necessary not only to establish the identity of the creditors but also to pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, we set aside the orders of the authorities below and restore the matter back to the ITO for doing the needful. 45. Ground Nos. C, D and E were not pressed by the assessee. In the result the assessee's appeal stands partly allowed. IT Appeal No. 2747 (Delhi) of 1981 : The first ground in the departmental appeal is with regard to deletion of addition of Rs. 5 lakhs made by the ITO to the trading results of the assessee. The addition in question was made because, according to the ITO, the rate of gross profit this year had declined to 7.4 per cent from 9.2 per cent shown in respect of the assessment year 1976-77. It was also pointed out by the ITO that the books of account of theKabulbranch had not been produced by the assessee before him and that the sales and purchases made inKabulwere not supported by vouchers. The aforesaid addition made by the ITO was challenged before the Commissioner (Appeals). It was pointed out to him that, so far as the purchases and sales in Kabul were concerned, they were all in cash and that there was no system in Kabul of issuing vouchers, and that this practice had been proved by necessary certificate from the Indian Chamber of Commerce. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be clear from the following chart : "Hukam Singh Inder Mohan Singh (Kabul) Details of gross profit rates Assessment year Sales Gross profit Gross profit rate 1973-74 1,32,84,689 11,13,972 8.3 per cent 1974-75 1,08,96,807 10,96,866 10 per cent 1975-76 1,99,38,926 13,21,776 6.7 per cent 1976-77 2,41,65,518 22,37,770 9.24 per cent 1977-78 2,88,19,060 21,28,419 7.38 per cent 1978-79 2,28,86,296 11,10,909 5 per cent Therefore, to disturb the trading results of the assessee only because the gross profit margin has gone down may not be correct. The addition made was, therefore, in our opinion, rightly deleted by the Commissioner (Appeals) and we sustain his order on this account. 47. Rs. 6,88,635 were added by the ITO to the assessee's total income representing value of remittance of 5,000 dollars each in favour of Sardar Swinder Singh, Shri Inder Mohan Singh and Shri Surbir Singh. The said addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 91 of the Act in respect of Rs. 5,17,923 paid as income-tax inKabulon the basis of receipts filed. The ITO has not dealt with the claim of the assessee for double taxation relief in his order. The learned Commissioner (Appeals) has, however, held that the relief in question is due and that the same should be granted to the assessee. The learned departmental representative has questioned the correctness of the judgment of the Commissioner (Appeals) and had pointed out that, so far as Afghanistan was concerned, it did not recognize the entity of the firm for the purpose of income-tax and, therefore, the firm had paid no tax in Afghanistan, and inasmuch as the unit of assessment in India, was firm which had paid no tax in Afghanistan the firm could not the entitled to claim double taxation relief. If at all, anybody was eligible for double taxation, it would be the new partners and they should make the claims in their individual assessments. 53. On behalf of the assessee the order of the learned Commissioner (Appeals) is supported. 54. In our opinion, there in merit in departmental contention. It is accepted by the assessee's learned counsel that, so far asAfghanistanwas c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner (Appeals), therefore, stands modified to the above extent. In the result, the departmental appeal stands partly allowed. Per Shri Anand Prakash, Accountant Member - These appeals were originally disposed of by the Tribunal vide order dated17-9-1983. The same was later recalled. The appeals were, therefore, reheard by us and are being disposed of by the present combined order. 2. The only question involved in the present appeals is as to what is the correct status of the assessee-whether resident or non-resident. The law bearing on this issue is contained in section 6(2). According to it a firm will be resident in the previous year in every case except where it can show that in the given previous year the control and management of its affairs was situated wholly outsideIndia. The onus to show that the assessee fell in the aforementioned exception clause was on the assessee, who claimed the protection of the exception clause in the present case. 3. The assessee-firm has led the following evidence and made the following submissions in support of its case. It has placed on record the affidavits from two of its partners S. Surinder Singh and S. Inder Mohan Singh, dated12-1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh, a partner, was invariably inKabul, in his absence, the business was carried on through the staff employed over there ...'. According to the assessee, the above inference was inescapable 'on perusal of (i) the above documents, (ii) book of account ..., (iii) various details already filed with the ITO during the course of assessment proceedings, and (iv) on perusal of the records seized at the time of search under section 132 of the Income-tax Act ..." 4. Referring to the barter system introduced through Indo-Afghan Trade Agreement dated 20-3-1972, the assessee submitted that the transactions of exports to and imports from Indian parties have been on principal to principal business (see paragraph 8 of the above note) and that 'the assessee-firm never exported goods to any agent in India so as to be sold on their behalf in India'. 5. In her letter dated 9-2-1982, the ITO pointed out to the assessee than the Commissioner (Appeals) had decided the issue of status against the assessee-firm vide his orders for the assessment year 1975-76 and 1977-78, and invited the assessee to furnish in detail 'your arguments along with supporting evidence ...'. The assessee replied to the afore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces it was clear that the control and management cannot be taken as 'wholly outside India', that the firm had huge assets in India in the form of dues from sister concerns, that the firm had failed to produce correspondence file and other 'evidence to establish that the entire purchases of the firm in India had been handled from Kabul', that the material seized from the residences of S. Surinder Singh and S. Inder Mohan Singh contained correspondence to show that they were taking continuous interest in the affairs of the firm, that on identical facts the status of the assessee had been taken by the ITO as resident for the assessment year 1975-76, 1977-78 and 1978-79 and had been upheld by the Commissioner (Appeals) for the assessment year 1975-76 and 1977-78. The ITO also relied on the reasons given by the Commissioner (Appeals) for the assessment year 1975-76 and 1977-78 for holding the assessee-firm as resident. The above reasons given by the ITO for the assessment year 1973-74 were imported by him in his order for the assessment year 1974-75 also. On appeal, the learned Commissioner (Appeals) had confirmed the orders of the ITO by relying on the reasons given by him for the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... normal course of events, and the ITO had no onus to lead evidence in support of it. It was for the assessee to lead evidence in support of its case, if it wanted to plead that the natural course of events did not follow. The assessee failed to place any such evidence on record. S. Surinder Singh and S. Inder Mohan Singh were the other partners, who were inIndiathroughout the relevant previous years. We have given detailed reason in our order for the assessment year 1977-78 to show as to how the averments of the assessee-firm that both the above partners took no parts in the affairs of the firm while inIndiacould not be believed and was against the human probability. Those reason apply in full force for the years under consideration also. In fact, the assessee had led no evidence whatsoever to show that the pattern of management did undergo a change during the previous year under consideration compared to what the pattern was from 1957-58 to the assessment year 1972-73, and what was found as a fact to be in respect of the previous year for the assessment year 1977-78 on the basis of seized documents, referred to in our order for the assessment year 1977-78. The change in the pattern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is in IT Appeal No. 1571 (Delhi) of 1982 (assessment year 1977-78) and virtually that reasoning has been adopted for the other years although for the assessment year 1975-76 (in I T Appeal No. 741 (Delhi) of 1982) there is also additional discussion on the issue, hence, my dissent is also a common one. 2. It this further clarified that the dissent in all the cases is limited to one common issue, viz., 'residential status' and on all other issues involved in these cases. I fully concur with the reasoning and conclusion of my learned brother. 3. The issue involved embraces the controversy about the 'residential status' in which the assessment ought to be framed for the years under appeals. The assessee claims that the status should be accorded as 'non-resident' while according to the revenue it is 'resident'. Section 6 has been pressed into service by the learned lower authorities, the material part of which (for the purpose of the present appeals) reads as under : "For the purpose of this Act, - (1) ** ** ** (2) A Hindu undivided family, firm or other association of persons is said to be resident inIndiain any previous year in every case except where during that year the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onship of partnership does or does not exist between the parties must depend on the real intention of the parties, which must be gathered from all the facts of the case and the surrounding circumstances. The question in each case is largely one of the fact to be determined with reference to the special circumstances of each case. Thus, it has been held that a mere statement that the parties are to be partners will not necessarily constitute them partners in law. The use of the word 'partner' or 'partnership' in the agreement does not necessarily show that there was a partnership. The parties may call themselves partners, but if it appears that one party is to do nothing more than advance money to the other, and is to be paid by a share of the profits, they may be treated as creditor and debtor. Even a misdescription of the parties in the pleading will not affect the merits of the case, the relationship between them being always determined upon the real character of the contract between them. But where certain persons refers to themselves as a firm, it must be presumed even in the absence of evidence, that they are the persons who have entered into partnership with one another and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an Singh (Kabul) since three out of the four partners were carrying on business at Kabul in Afghanistan in their individual capacities and in this view of the matter on the facts and the circumstances of the cases, it cannot be said that there was a firm by the name and style referred to above, the control and management of whose affairs it situated wholly outside India. There being no such an entity, there could not be any control and management of the affairs of such an entity, hence, the very basic proposition about the business of the firm vis-a-vis its existence has got to probed into. The facts are that there appears to be no genuine firm in existence during the accounting periods relevant to the assessment years under appeals and since we have held that taxes were paid in Afghanistan by the partners in their individual capacities, it has to be re-examined whether there was a partnership firm in existence and for the purposes, on my part, I will set aside the orders of the learned lower authorities on this limited issue only and restore the matter to the file of the ITO for re-examination of the matter in the light of guidelines laid in section 4 and 6 of the Partnership Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... For this conclusion, inter alia, the reason given, inter alia, was that control and management of its affairs was not situated wholly outsideIndia. However, the learned Judicial Member has appended his signature to the order, subject to a separate note. 2.1 While, holding that the assessee is not entitled to double taxation relief under section 91, the Bench has observed vide paragraphs 52 to 54 of its order, that so far asAfghanistanwas concerned, its law does not recognise the entity of the firm and does not subject the firm to income-tax. The individuals are subjected to Hasiyat tax (i.e., income-tax) paid inAfghanistanby individual, who are carrying on the business. From the above observation the learned Judicial Member has inferred that the Bench's finding is that there was no entity in existence by the name and style of Hukum Singh Inder Mohan Singh (Kabul) and if there was no firm in existence inKabul, the question of control over its management from withinIndiacould not possibly arise. It is for this reason that he has considered it desirable to set aside the order of the lower authorities on this limited issue and restored the matter to the file of the ITO for re-examin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of control and management over such a business whether wholly from outsideIndiaor not will not arise for consideration. However, this is a matter which will have to be sorted out by the Bench itself and not by me, as a third Member I do not find any conflict of views on the issue. 5. For the purpose of the present proceedings, I, therefore, assume that the Bench has expressed a doubt about the existence of the entity under the style Hukam Singh Inder Mohan Singh inKabul. If that is so, I am of the view that the point of difference, as stated by the learned Members, requires certainly to be gone into. As rightly pointed out by the learned Judicial Member, the question of control, which is very essential for deciding the residential status of the assessee, would not arise in the case of a non-existent entity inKabul. 6. Having regard to the above discussion, I am inclined to hold that the Bench may have first to decide as to what they really mean by observing that so far as Afghanistan is concerned, its law does not recognise the entity of the firm nor does it subject the firm to any income-tax and only the individuals, who carry on the business, are liable to pay 'hasiyat-tax', ..... X X X X Extracts X X X X X X X X Extracts X X X X
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