TMI Blog2004 (10) TMI 291X X X X Extracts X X X X X X X X Extracts X X X X ..... ified in cancelling registration under section 186(1) of the Act for the assessment year 1990-91 and thereafter denying the benefit of registration for the subsequent two assessment years, viz., 1991-92 and 1992-93. 2. The order passed by the Appellate Commissioner is a common order dated 30-1-1995 and it covers the dispute regarding registration from the assessment year 1985-86 to the assessment year 1991-92 (7 assessment years). In the common order which has been impugned by the assessee for the assessment years 1990-91 and 1991-92, the Appellate Commissioner directed the Assessing Officer to grant registration not upholding the action under section 186(1) for the assessment years 1985-86 to 1989-90. Thus, the appellant-assessee was victorious in its first appeals for the assessment years 1985-86 to 1989-90 and got the benefit of registration. It is only for three assessment years viz. 1990-91 to 1992-93 that the appellant-assessee could not succeed in first appeal in obtaining registration for these three years. 3. The appellant is a partnership firm which was originally constituted under a partnership deed dated 15-4-1980 consisting of 12 partners and a minor admitted to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adia (for short Kapadia) to act on their behalf and get the sales registered in favour of the purchasers. The later sale agreements were modified accordingly for the purpose of smooth registration of the flats. The format of the sale deed was also drafted on the basis of the revised sale agreements. 6. While filing the return of income for the assessment year 1990-91, the appellant declared its status as that of Association of Persons and not as a Registered Firm although it had filed application in Form No. 11A for claiming registration of the firm as in the past years. In the returns for the assessment years 1990-91 and 1991-92, the partners of the appellant-firm had declared the share income as from AOP and not from Registered firm. The appellant-firm even opened a fresh bank account in the status of owners and started operating the same. Later, after being revised returns for the assessment years 1990-91 and 1991-92 declared the status of registered firm and not as AOP and claimed registration for both the assessment years. The partners of the appellant-firm individually also filed revised returns for the assessment years 1990-91 and 1991-92 declaring share income as from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sushil D. Kapadia refers to M/s. Amrit Apartments not as a firm. The individual members are depicted as owners of the plots. 9. In response to the show-cause notice dated 12-3-1994, the appellant-firm once again filed a detailed explanation on each of the points raised by the Assessing Officer. The appellant-assessee denied the proposal/suggestion of the Assessing Officer that it figured as an AOP in the records of the Urban Land Ceiling Authority and it was explained that there was no need for any such declaration as none of the partners, who contributed land to the partnership, held any land in excess of the permissible limit of 1,000 sq. mts. It was further stated in the reply by the appellant-firm that the Assessing Officer had not referred to any specific document from the Urban Land Ceiling Authority which could show or demonstrate that the appellant figured as an AOP in its records. The Assessing Officer was unable to do so. As regards the bank account in the name of M/s. Amrit Apartments, AOP, it was explained that ever since the inception of the firm in April 1980 till October 1989, the appellant-firm had only one current account with State Bank of Hyderabad, Bank Stree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ners' returns for the assessment years 1990-91 and 1991-92 which were filed first showing share income from AOP were subsequently corrected by filing proper revised returns and showing the share income from the firm and later assessed accordingly. It was thus pleaded before the Assessing Officer by the appellant-firm that these steps taken during the last few years because of the fear that the whole process of registration of flats might come to a grinding halt, should not be considered as factors militating against the proven genuineness of the firm for the last eight years. 10. As regards the sale of land by Smt. Kasturiben Hiralal and Sri Hirji Hansraj to Kumari Varsha and Shri Sushilkumar, it was explained before the Assessing Officer that the so-called sale of land was a mere sale of the interest of the outgoing partners in the partnership. It was further urged that when these two partners had thrown the land into the common stock of the partnership, which fact was evidenced by record of the firm, they ceased to be the owners of the respective plots of land and the land had become the property of the partnership. Under the arrangement entered into by the outgoing and incomin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the provisions of Urban Land Ceiling Regulations Act but that would not affect the legal existence of the partnership firm. (v) The assessee declared its status to the bank as owners, only after 1989. Upto 1989, the firm was declaring its status to the bank as partnership and thereafter due to difficulty in registration of flats, the relationship was differently described. (vi) The Assessing Officer's finding that the appellant had not mentioned the status as a firm while applying for approval of the building plan was not correct. The application was submitted by Sri Sudhi C. Gala who was a partner of the firm. He had mentioned his designation as owner and partner. It was not necessary that all partners should sign the applications for sanction of the building plan. Thus, the Appellate Commissioner, in paras 6 to 9 of the impugned order, negatived the grounds taken by the Assessing Officer to cancel the registration already granted for the assessment years 1985-86 to 1989-90. He has given a categorical finding that upto assessment year 1989-90 the appellant-firm as described in the successive partnership deeds did factually exist and the firm so constituted was legall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se findings of the Appellate Commissioner for the assessment years 1990-91 to 1992-93 that are challenged before us for adjudication. 13. Both sides have filed written submissions which have been placed on the record. There is nothing new in the written submissions filed by the assessee as it reiterates the contentions and case laws relied before both the lower tax authorities. The written submissions filed by the departmental representative also reiterates the stand of the Assessing Officer which we have briefly recorded above. The departmental representative also drew support from the judgment of the Supreme Court rendered in the case of S.P. Gramophone Co. and from the decisions of the Hon'ble Andhra Pradesh High Court in the case of Madhusudana Co. v. CIT [1973] 88 ITR 395. 14. In cancelling the registration, the below given factors weighed heavily with the Assessing Officer: (i) The assessee figures in the status of AOP on the records of Urban Land Ceiling Authority. (ii) The assessee opened an account in State Bank of Hyderabad, Bank Street, Hyderabad, in the Status of AOP. (iii) The two erstwhile partners Smt. Kasturiben Hiralal and Shri Hirji Hansraj, having thr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the non-description of the appellant firm as a firm in the Power of Attorney executed by the partners in favour of Shri Sushil Kumar D. Kapadia could ever lead to a conclusion that the firm is a non-genuine firm thus empowering the Assessing Officer to resort to cancellation of registration under sub-section (1) of section 186 of the Income-tax Act, 1961. 15. It is a settled law that in order to constitute a partnership, there must be three elements: (i) There must be an agreement entered into by two or more persons; (ii) The agreement must be to share the profits of a business; and (iii) the business must be carried on by all or any one of those persons acting for all. All these three elements must be present before a group of persons can be held to be partners of a partnership. 16. The Gujarat High Court in the case of Baroda City Ice Co. v. CIT [1962] 44 ITR 56 has held that if the essentials of a valid partnership do exist, then the firm is entitled to registration by the fulfillment of statutory requirements. The Bombay High Court also in the case of CIT v. Hind Commission Agents [1963] 48 ITR 615 has held that it is not necessary that, in order that a business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ong in taking a view that the firm was not a genuine one for the assessment year 1990-91 and upholding the cancellation of registration under section 186(1) of the Act. Similarly, we do not approve the action of the Appellate Commissioner in upholding the denial of registration for the assessment years 1991-92 and 1992-93 while making prima facie adjustments and adopting the status as that of URF. 18. As recorded by us above, the partners of the assessee firm from time to time have been filing their returns and declaring the share income from the appellant firm which has been assessed accordingly. It is only for the assessment years 1990-91 and 1991-92 that the partners declared their share income from the AOP and not from the registered firm which returns were subsequently revised and the mistake rectified showing the share income from the registered firm and not from the AOP. The Hon'ble Supreme Court in the well known case of CIT v. Murlidhar Jhawar Purna Ginning Pressing Factory [1966] 60 ITR 95 have held that if the assessment of a partner has been finalised accepting share income from a partnership firm then it is not open to the Assessing Officer to assess the firm as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they were dummies, as the new partners in that case made statement that they had signed the instrument mechanically without knowing or reading. As we have recorded above, in the instant case no such enquiry has been made and not a single partner has been examined by the Assessing Officer which could have perhaps established the non-genuineness of the firm. Therefore, the Apex Court's decision in the S.P. Gramophone Co. case cannot be applied. 21. The decision of the Hon'ble Andhra Pradesh High Court in the case of Madhusudana Co. also cannot be applied because in that case also the Assessing Officer established that the firm was a non-genuine and the three other partners who were inducted to the firm were all dummies and not the real partners. On these facts, the Andhra Pradesh High Court upheld the Tribunal's findings which was based on the material that there was no genuine firm in existence and that the business was a sole proprietary concern of one individual. We reiterate that no such enquiry or exercise has been done by the Assessing Officer in the instant case and, therefore, the decision of the Andhra Pradesh High Court in Madhusudana Co.'s case is distinguishable. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uing show-cause notice has not allowed the benefit of registration to the assessee for this year, by her order dated 31-3-1994. When the assessee contested the action of the Assessing Officer for these two years, the CIT(A), vide his impugned consolidated order for all the assessment years from 1985-86 to 1991-92, dated 30-1-1995, confirmed the cancellation of the registration for 1990-91 and 1991-92 assessment years, though he held that the registration allowed for the earlier years was very much correct. Aggrieved by the order of the CIT(A) insofar as it related to assessment years 1990-91 and 1991-92, assessee preferred the present appeals before us. Similarly, for the assessment year 1992-93, assessee filed Form No. 12 on 28-8-1992, and return of income on 29-4-1994. While processing the return under section 143(1)(a), Assessing Officer treated the status of the assessee as 'URF'. Assessee's application seeking rectification under section 154 has been rejected by the Assessing Officer by his order dated 25-8-1995. On appeal, the CIT(A) confirmed the action of the Assessing Officer, vide impugned order for that year dated 27-11-1995. Aggrieved by this order of the CIT(A), assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een opened in October, 1989, and the new format of the sale agreement and sale deed has been also used for the first time during that period. All these facts sufficiently indicate that the erstwhile partners of the firm did not intend to continue as a partnership, but they have changed their status as AOP..." There is no dispute with regard to the correctness of these facts noted by the CIT(A) in the impugned order, and there is a material change in the status in which assessee carried on its activity after 1989-90, when compared to its position earlier. 4. The Assessing Officer while cancelling the registration granted for the assessment years 1985-86 to 1990-91 and refusing registration benefit for the assessment year 1991-92, was guided by this material change in the status of the assessee. Under the Hyderabad Urban Land Ceiling Act, 1976, the definition of 'person' includes an individual, a family, a firm, a company or an Association of Persons, and under the Land Ceiling Act, each person is allowed to hold 1,000 sq. mtrs. of land situated in the urban agglomeration. However, the land bearing No. 6.3-668 owned by all the partners of the assessee-firm was having total area o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lding under the Urban Land Ceiling Act. 6. In the case of S.P. Gramophone Co. the Hon'ble Supreme Court held that the emphasis in the provision is with regard to the satisfaction of the Assessing Officer as to the non-existence of a genuine firm during the previous year. There is thus a limitation imposed by the legislation for cancellation of registration. It has been confirmed to one ground only, that is, the firm that existed during the relevant year was not genuine. Such a power cannot be equated with a power to grant registration to a firm under the Act, there shall be a firm valid in law and also in fact. The concept of the firm being valid in law is distinct from its factual genuineness and for the purpose of granting registration, both the aspects are relevant and must be present and fulfilment of one without the other will be insufficient. But these two requirements need not be present for purposes of cancelling the registration once granted. If the Assessing Officer wants to cancel the registration under section 186, all that he has got to know is whether there was during the previous year, no genuine firm in existence as registered. In the case on hand before us, the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of his order have no application to the facts of the case on hand, inasmuch as the assessee was claiming itself to be an AOP for certain purposes in order to overcome the difficulties envisaged in continuing to be a firm while registering the properties in the names of the independent owners, in terms of Urban Land Ceiling Act: Thus, the assessee itself was claiming its status to be AOP for certain purposes and to be a firm for certain other purposes, in order to derive benefits of both the statuses under different legislations at the same time. Such a stand of the assessee is not permissible in law, as laid down by the Hon'ble Supreme Court in its decision in Biharilal Jaiswal v. CIT [1986] 217 ITR 746. The Hon'ble Supreme Court in that case at page 759 of the Reports (217 ITR) observed as follows:- "One arm of law cannot be utilised to defeat the other arm of law. Doing so would be opposed to public policy and bring the law into ridicule. It would be wrong to think that while acting under the Income-tax Act, the Income-tax Officer need not look to the law governing the partnership which is seeking registration. It would have probably been a different matter if the Income-tax A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch 'B' and the question referred by the Members is as under: "Whether on the facts and in the circumstances of the case, the cancellation of registration for the assessment year 1990-91, and refusal of renewal of registration for the assessment years 1991-92 and 1992-93 is justified?" 2. The facts of the case in brief are that the assessee-appellant is a partnership firm constituted on terms and conditions contained in Partnership Deed dated 15-4-1980. It comprised of 12 partners including a minor admitted to the benefits of partnership. The object of the firm was to acquire land and construct flats, shops, garages etc., and sell them to the prospective buyers on ownership or other basis. Six of the partners owned immovable properties in the shape of contiguous plots, which were thrown into common stock of the firm as capital contribution in terms of section 14 of the Partnership Act. Others partners contributed cash towards their share of capital. The firm carried on business and was assessed as the registered firm till assessment year 1989-90. In accounting year 1989-90, a further change in the constitution of the firm took place and following two partners retired from the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of AOP. III. The two erstwhile partners Smt. Kasturiben Hiralal and Shri Hirji Hansraj, having thrown their plots of land in the common stock of the partnership have later sold the same indicating that the plots remained the property of the individual members. IV. The sale agreements for flats entered into in 1992 refer to the ownership of the parties of their respective plots. V. The partners filed their returns for assessment years 1990-91 and 1991-92 treating the status of the entity as AOP and later reversed to the status of partners in a registered firm. VI. The power of attorney executed by the partners on 26-10-1989 in favour of Shri. Sushil D. Kapadia refers to M/s. Amrit Apartments not as a firm. The individual members are depicted as owners of the plots." 5A. The learned JM referred to show-cause notice dated 12-3-1994 issued by the Assessing Officer and detailed reply given by the assessee to the above show-cause notice. He noted that the assessee had denied that it figured as an AOP before Urban Land Ceiling Authority. It was noted that no specific document where appellant declared itself as an AOP before Urban Land Ceiling Authority was shown. As regards ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, they ceased to be exclusive owners of respective plots held by them under an arrangement between outgoing and incoming partners. The land remained the property of the firm. The assessee did not part with any portion of firm's property under section 14 of the Partnership Act. 7. The learned JM noted that the Assessing Officer rejected all the contentions raised on behalf of the assessee and treated the firm as URF for the assessment year 1990-91. Consequently orders for assessment years 1991-92 and 1992-93 were passed refusing benefit of continuation of the registration. 8. The learned JM then proceed to consider the proceedings before the Appellate Commissioner. He noted the contentions raised on behalf of the assessee in para 12 of his order and found that the Appellate Commissioner held the firm to be non-genuine for the following reasons: (i) "The format of the agreement of sale has been changed. While in the earlier format used up to Diwali, 1989, M/s. Amrit Apartments (the assessee) was referred to as a 'Partnership Firm', in the last format M/s. Amrit Apartments has been described as a compendium of independent owners who have authorized one of them, Shri Sushilkumar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot make the appellant firm a non-genuine one so as to loose the registration benefit under section 186(1) of the Act. We fail to see any justification on the part of the Assessing Officer to cancel registration for the reason that in the sale agreements of constructed flats the partners are identified or described as owners of their respective plots, which they brought into the appellant-firm at the time of its formation. Similarly, how can the firm become a non-genuine one if few partners in their individual returns for the assessment years 1990-91 and 1991-92 mention their share income from the AOP and not registered firm, particularly when such mistake the subsequently rectified in the revised returns filed by the respective partners. We are unable to agree with the Assessing Officer as well as the Appellate Commissioner that the non-description of the appellant firm as a firm in the Power of Attorney executed by the partners in favour of Shri Sushilkumar D. Kapadia could ever lead to a conclusion that the firm is a non-genuine firm thus empowering the Assessing Officer to resort to cancellation of registration under sub-section (1) of section 186 of the Income-tax Act, 1961 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 66. He further relied upon the cases of V.H. Seth and Narnauli Jewel Corpn. 8.2 The learned JM further observed that partners of firm from time to time have been filing their returns declaring share income from the appellant firm. Even for assessment year 1990-91, share income from firm was shown in the revised returns and assessed accordingly. The learned JM further noted that the Assessing Officer did not carry on any full-fledged enquiry regarding genuineness of firm by examining the partners or any persons having dealings with the firm but merely noticed certain misdeeds, mistakes and irregularities and jumped upon a conclusion that the assessee is a non-genuine firm. The learned JM distinguished the decision of Supreme Court in S.P. Gramophone Co.'s case and Madhusudana Co.'s case and held them not applicable to the facts of the case. 8.3 With the aforesaid observations, the learned JM allowed assessee's appeals and held that the assessee be treated as registered firm for all the three years under consideration. 9. Learned Accountant Member did not agree with the above view of the learned JM. After reporting the facts of the case on which there is not much controversy, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove transactions and was granted registration up to assessment year 1989-90. The firm was treated as a genuine firm. There is further no dispute that even in the three years under consideration, the partnership maintained books of account and profit of the firm was distributed among the partners as provided in the instrument of Partnership dated 1-4-1989. On account of certain acts and deeds, which were described by the learned JM as misdeeds, mistakes and irregularities, the firm was treated as non-genuine. The objections raised by the Revenue authorities have been fully met by the learned JM and therefore there is nor reason for not agreeing with him. All the same, I would further briefly give my reasons for adopting the above course: 10.1 The fact of retiring partners Smt. Kasturiben Hiralal and Shri Hirji Hansraj dealing with the plots, which they had contributed towards capital of the partnership is one circumstance taken against the assessee. In my humble opinion, the approach of the Revenue is not correct in law. The properties were thrown in the common pool at the inception of the partnership. That is somewhere in financial year 1980-81 or 1981-82. The act of throwing ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been taken into consideration without in any way impinging upon the legality of constitution and continuity of a valid partnership noted in para 15 of the order of the learned JM. So, the question that arises is whether any of the acts of the partners resulted in modification of the agreement stated in the instrument of Partnership Deed dated 1-4-1989 or altered the share of profits which the partners were entitled to in the partnership business and lastly, whether any act went against the principle of agency; one partner acting on behalf of all other partners? Answer to all the above questions is 'No'. 11.3 There is no finding or indication to show that in the alleged AOP these partners had different shares or some outsider shared the profits or any term of the partnership was violated or the profits were divided otherwise than as reflected in the books of account. In fact, as rightly contended by the learned counsel for the assessee, no assessment of AOP was made. The assessment was made as URF. In other words, assessment was made of a firm without showing that firm so assessed had a constitution different from the one pleaded and projected by the assessee. It is, therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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