TMI Blog1990 (6) TMI 118X X X X Extracts X X X X X X X X Extracts X X X X ..... g partners by a deed dated 1-1-1975. Thus in the three previous years relevant to the assessment years 1972-73 to 1975-76 ,the business in stainless steel was conducted only by Thanaseelan who was in charge of the accounts etc. The assessments of the firm for these years had been completed on 31-1-1974, 30-3-1974, 16-9-1974 and 29-12-1975 respectively. 3. Subsequently on 9-12-1976 there was a search in the premises of Seelan Metal Corporation where Thanaseelan and his brother Bharathiseelan were partners as well as in their residences. Certain sheets of paper were found in the residence of Bharathiseelan with the superscription "1964 T.A.I." with the statement of account indicating accounted profit of Rs. 29,867.35 and unaccounted profit of Rs. 1,04,654.56. These profits were also shown to be divided between S.P.T. and N.K.T. for 1961-62 to 1963-64. Thanaseelan was examined on 9-12-1976 and he stated that this document had been maintained in a code such that 1964 represented 1974 and the years 1961-62 etc. represented 1971-72 etc. respectively. He also stated that the document showed unaccounted income derived when he was a partner of Thangam Aluminium Industries. On 27-12-1980 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oss-examination he stated that he was only a part-time employee and did not know about the transactions of Thanaseelan when he was not present. The husband of Smt. Thangam was also examined on 30-3-1981. He denied having taken part in any unaccounted transactions on behalf of his wife and said that he had no connection at all with the firm. 4. The other relevant fact is that in the sales tax proceedings Thanaseelan failed to turn up for cross-examination and it was suggested by the assessee that the letters 'TAI' might have represented Thanaseelan Aluminium Industries, another concern owned by Thanaseelan. The AAC of Commercial Taxes by his order dated 10-2-1982 accepted this contention and deleted the unaccounted turnover mentioned in the seized document which was added to the turnover of the assessee. 5. On these facts, the IAC gave his directions on 30-3-1981 u/s. 144B holding that the document related to the business of the assessee and that unaccounted profit shown therein must be added to the total income of the assessee-firm, and the reassessments were completed accordingly. 6. On appeal, the CIT (Appeals) for the assessment year 1974-75 held that since there was anoth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of affairs. The document is in code as stated by Thanaseelan, 1964 representing 1974 and TAI representing Thangam Aluminium Industries. If we were to go only by this statement, a doubt is cast by stating that the 'TAI' may represent Thanaseelan Aluminium Industries. The benefit of this doubt has been given by the sales-tax authorities. However, the revenue has not cared to remove this doubt by producing the assessment of Thanaseelan Aluminium Industries to cross-check the transactions in the seized document with those of Thanaseelan Aluminium Industries. We are, therefore, left only with the internal evidence in the document itself along with the statement of Thanaseelan as to the question whether he had entered into unaccounted transactions. One significant fact is that this document contains in a different ink certain transactions on the top which admittedly tallied with the transactions of the assessee-firm recorded in its books. It is, therefore, not possible to reject the evidence of Thanaseelan that he had entered into clandestine transactions and made a secret profit of Rs. 1,04,654. Whether this profit belonged to himself or to the firm is a different question. 10. The co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndependent entity in law though it is treated as a taxable entity. The question of the secret profit being treated as that of the firm can arise only if the other partners assent to the unaccounted transactions carried on by the delinquent partner. This assent has to be established with reference to the conduct of other partners since such conduct may also amount to a contract to the contrary as envisaged in section 16 of the Partnership Act. Moreover the concept of mutual agency and implied authority of the partner cannot be extended to illicit transactions unless ratified by the other partners. The revenue pointed to cases where firms have been accepted additions of income from undisclosed sources. But those are the cases which demonstrate the ratification of such transactions by all the partners and generally relate to existing firms where partners act in concert. In this case the firm was dissolved and the erstwhile partners resist the imputation that they had a share of the secret profits stated to be made by a retired partner who was in sole charge of the business. 12. Looking into the facts in this angle, we find that except for a division of profits in the seized document ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, agree with the orders of the authorities below that the unaccounted profits revealed by the seized documents cannot be added to the total income of the assessee. Their orders are confirmed. 13. The appeals are dismissed. Per Accountant Member --- I have given anxious consideration to the findings recorded by the Hon'ble Judicial Member in this case. I find it difficult to accept the final conclusion given by him in this order. 2. The area of disagreement is very narrow and not large. The Hon'ble Judicial Member has concurred with the view that the profit shown in the secret accounts will have to be brought to tax. This is the view of the Department and I am in respectful agreement with this view. The further question is whether the secret profit should be assessed in the hands of the firm or only in the hands of the partner, N.K. Thanaseelan. It is here that I am inclined to disagree with the Hon'ble J.M. He had taken the view that the secret profits must be assessed in the hands of Thanaseelan. I consider that the same should be assessed in the hands of firm only. 3. The facts of the case have been detailed in paras 2, 3 and 4 of the Hon'ble J.M's order. The search o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent deposition by Thanaseelan before the Income-tax Authorities that he was coerced into giving such a retraction before the Sales-tax Authorities. 4. The argument on behalf of the assessee-firm was that no evidence was let in to show that the other partners actually received a secret of the secret profits and that the division as found in the seized document related to two partners whereas there are three partners during the part of the period. It was also argued that in the dissolution deed on his retirement Thanaseelan was paid a sum of Rs. 12,768.54 for which he has claimed that he was paid a sum of Rs. 57,768 as evidenced by the seized document. The clarification in this regard is to be found in para 27 of the proceedings of the IAC under section 144-B. This is reproduced below :--- "27. The learned representative also pointed out that as per seized sheet the amount received by Mr. Thanaseelan was Rs. 11,552 whereas, according to the dissolution deed the amount shown is Rs. 12,768.54. As per the entries on the reverse side of sheet No. 32 Sri Thanaseelan has received Rs. 57,768.00 and the break up of which is as under :--- Unaccounted profits Rs. 32,136.17 Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egards proof for the other partner Smt. P. Thangam receiving her share of the secret profits, the following questions and answers given by Thanaseelan may be read with interest from the sworn statement recorded on 25-3-1981 :--- "Q. 46 : What is the proof for such division having taken place? Ans. The evidence for division is the entry made in the relevant sheet Nos. 9, 30, 31 and the reverse side of 32. The profit was in the form of stock and cash. These assets remain in the firm's premises. So far as share of SML Thangam is concerned, it is available in the same permises (belonging to her husband) and she had the means to take it at any time, So far as I am concerned, my share could be given only by them and I was given by share, to the extent mentioned in the sheet Nos . 9, 30, 31 and reverse side of 32." I consider that on the facts of this case when the stocks were only in the premises belonging to the major partner Thangam, there can be no more evidence necessary to link the sharing of the' secret profits in the form of stocks by the major partner. There is yet another objection that the profits are divided into two items. There are partners during the pan of the period ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by all or any of them acting for all. Section 9 of the Partnership Act enjoins on the partners a duty to carry on the business of the firm to the greatest common advantage, to be just and faithful to each other and to render true accounts and information and all things effecting the firm to any partner. The IAC in his order in this regard has referred to the relevant clauses in the partnership agreement which imposes an obligation on partner Thanaseelan to individual partner Smt. Thangam and consult her about the business of the firm. Section 11(2) of the Partnership Act provides that while mutual rights and duties of the partners may be determined by contract among themselves, such contract may also provide that a partner shall not carry on any business other than that of the firm while he is a partner. An implied agreement may be inferred from the course of dealing between the partners to the effect that no partner shall carry on business in his own name to the detriment of the partnership. Such an implied agreement arises from the conduct 'of the parties in this case. The Partnership Act lays down elaborate procedure for the affected partner to claim damages from the delinquen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence marshalled in this case, the profits found in the secret accounts must be assessed in the hands of the firm Thangam Aluminium Industries. The departmental appeal should be allowed. THIRD MEMBER ORDER 1. As there was a difference of opinion - regarding taxability of unaccounted profit in the hands of the assessee-firm - between the learned Members who heard these appeals, the matter was placed before the President under section 255(4) of the Income-tax Act, 1961 with the following question to resolve the difference :--- "Whether on the facts and in the circumstances of the case, in the absence of the consent of the other partners the admission of concealed income by an erstwhile managing partner alone can lead to a legal inference that the firm had concealed its income prior to its dissolution?" The President has assigned the matter to me under aforesaid section of the Act. 2. Both the parties were fair enough to state that the relevant/material facts are properly stated in 0 2 to 4 of the order of the learned Judicial Member. For the sake of appreciating the rival stand of the parties and completing my order, the said paragraphs are reproduced below :--- "2. The ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unrecorded transactions below that, that the division of profits was given at the bottom. He also stated that separate books of transactions used to be maintained but had been destroyed subsequently. According to him, his share of unaccounted profit for the years aggregated to Rs. 32,136 and the credit balance in his account Rs. 1 1,562 totalling Rs. 57,768 in respect of which he received a sum of Rs. 3Z948 and stock of aluminium material amounting to Rs. 18,000 adjusted towards dies sent to Seelan Metal Corporation. He asserted that the statement given to the sales-tax authorities was not correct and that his present statement before the IT authorities represented the truth. He was cross-examined to show that he was not consistent in respect of certain details and therefore his evidence was not creditworthy. But he persisted with the statement that the document represented the true state of affairs of unaccounted transactions kept with him as aide memoire. Smt. Thangam was examined on 30-3-1981 and she denied that the firm had made any unaccounted profits or had entered into any unaccounted transactions. She further stated that the entire business was being carried on only by an. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue that the evidence available on record had not been properly appreciated by the CIT(Appeals)/ AAC. It was further submitted that in the seized material both the accounted profit as well as the recorded entries tallied with the books of accounts of the assessee for the relevant years and, therefore, the seized material represented a true picture of the assessee's business including the unaccounted transactions and profits made thereon. It was further submitted that even though Sri Ian might have given a different version before the Sales-tax Officer, he afterwards confirmed his original version before the ITO and, therefore, there was no reason why he should keep certain information about the transaction of the assessee-firm after his retirement from the firm unless it was a true state of affairs. It was, therefore, submitted that once the seized material gives the true pricture of the assessee's business, the unaccounted profit must be assessed as part of its total income. It was, therefore, urged that the orders of the CIT (Appeals)/AAC should be reversed. 5. On, the other hand, it was contended on behalf of the assessee that the testimony of Shri Thanaseelan was unreliable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mouth of the lady partners were to express their total ignorance about the transactions carried on by Thanaseelan outside the books. In support of his various submissions, he relied on the decision of the Hon'ble Supreme Court in the case of K.D. Kamath Co. v. CIT [1971] 82 ITR 680, of the Hon'ble Allahabad High Court in the case of Chitra Cinema v. CIT [1972] 86 ITR 203, of the Hon'ble Bombay High Court in the case of R.K. Dhingra Co. v. CIT [1976] 102 ITR 643 and of the Hon'ble Supreme Court in the case of ITO v. Radha Krishan [1967] 66 ITR 590. He, therefore, strongly urged that I should adopt the view taken by the learned Accountant Member. 8. The learned representative for the assessee, on the other hand, strongly supported the orders of the CIT (Appeals)/AAC as well as the order of the learned Judicial Member by reiterating the submissions which were made earlier before the Division Bench. In this connection, he urged that the earlier order of the Tribunal setting aside the order of the CIT(Appeals) and restoring the matter back to the file of the CIT(Appeals) for a fresh decision should also be considered. In fact, he invited my attention to the relevant portion of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uminium Industries and Seelan Metal Corporation are engaged in similar type of business, (ii) Shri Thanaseelan is the man who looked after all the three businesses, (iii) there were certain differences between the lady partners and Shri Thanaseelan of the assessee-firm, (iv) these differences led to the retirement of Shri Thanaseelan from the assessee-firm with effect from 1-1-1975, (v) the seized material was found at the residence of Shri Bharathiseelan, brother of Shri Thanaseelan, (vi) the notings in the seized material were made in two different inks and in two segments, upper and lower, (vii) Shri Thanaseelan gave different statements at different occasions before different authorities (viii) there was no prohibition for a partner to carry on similar business in his/her individual capacity, in the deeds of partnership, (ix) the deed of retirement dated 1-1-1975 clearly shows that Shri Thanaseelan was paid Rs. 12,768 in full and final settlement, and (x) the lady partners, the husband of one of the lady, partners and the part-time accountant of the assessee-firm categorically denied that there were any transactions other than that recorded in the books of account regularly mai ..... 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