TMI Blog1984 (2) TMI 91X X X X Extracts X X X X X X X X Extracts X X X X ..... . On the same date the two ladies entered into a partnership by executing a partnership deed and the partnership business came to be known as M/s. Subhash Medical Stores, Bhilwara. The firm was got registered with the Registrar of Firms and a bank account was also opened in the name of the firm mentioning the two ladies as its partners. However, the business continued to he carried on by Ramesh Chandra Moondra, as an employee of the registered firm on a remuneration of Rs. 250 p.m. It was he who operated the bank account on behalf of the partners. The information regarding the individual business converted into partnership firm was sent to the Sales Tax Department also. An application was filed on behalf of the firm under s. 184 of the I.T. Act, 1961 (hereinafter to be referred to as "the Act"), for registration of the firm under s. 185 of the Act. The prayer was rejected by the ITO on the ground that the two ladies had no knowledge about the business and Ramesh Chandra Moondra was really in control of the business. In the opinion of the Income-tax Officer (for short " the ITO ") the firm in the partnership of the two ladies was not genuine and was rather a device to evade tax. An ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i, who happens to be the wife of Shri Naresh Chandra Moondra, the real brother of Ramesh Chandra Moondra. It was on the same date that the two ladies, viz., Smt. Chandra Kanta Moondra and Smt. Shanta N. Maheshwari, entered into a partnership and executed the partnership deed dated July 1, 1959, annexure-3. The question emerging in the matter is as to whether the execution of sale deed by Ramesh Chandra Moondra in favour of his wife and sister-in-law for a petty amount of Rs. 4,500 and the creation of the partnership can be said to be genuine or it was a sham transaction to avoid tax liability, in the individual capacity. Mr. H. M. Parekh, learned counsel for the firm, strenuously contended that the partnership deed speaks of all the necessary ingredients for creating a partnership firm. That it was duly registered under the Partnership .Act and, as such, merely on the ground of the ladies having no knowledge of the business and they being closely related to Ramesh Chandra Moondra, there would be no justification to hold that the transaction was not genuine. Mr. J. P. Joshi, on the other hand, emphasized the fact that Ramesh Chandra Moondra could not have sold such a flourishi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were close relatives of Ramesh Chandra Moondra; (iv) the two ladies had no knowledge whatsoever of the working of the business; (v) their limited education, i.e., one educated up to 5th standard and the other up to 7th standard with Vidya, Vinodini Diploma gave an impression that they could not have understood the business of the firm. Regarding the investment, the statement of Smt. Chandra Kanta was that she sold her gold and silver ornaments and invested the money. Smt. Shanta N. Maheshwari has stated that she received Rs. 7,000 from the father-in-law in " Munha Dikhai " and she invested that amount in the partnership business. The learned members of the Tribunal were of the opinion that as the Specification of the ornaments said to be sold has not been given by Smt. Chandra Kanta and the father-in-law of Suit. Shanta Maheshwari could not explain the source of Rs. 7,000 stated to have been given to her, there was no material to establish that any amount was invested by the ladies. The conclusion was, therefore, drawn that the business continued as it was prior to the execution of the sale deed and the formation of the partnership by the two ladies. In order to determine the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nership law or common human experience. In the case of P. A. C. Ratnaswami Nadar Sons v. CIT [1962] 46 ITR 1148 (Mad), the father, after carrying on as a sole proprietor of a business for the manufacture and sale of matches, debited his personal account in the business with a sum of Rs. 27,000 on March 31, 1955, and credited each one of his son with Rs. 4,500. Thereafter a partnership deed was executed between the father and the sons and the minor sons were admitted to the benefits of the partnership. The licence standing in the name of the father was transferred in the name of the partnership. When an application was made for registration of the firm under s. 26A of the Indian I.T. Act, 1922, the ITO refused to register the firm on the ground that there was no deed of gift ; the credit entries in favour of the sons could not constitute gift ; the control and the management of the business remained with the father who was originally the sole proprietor ; and of the four sons only one had business experience. The AAC and the Appellate Tribunal confirmed the findings of the ITO. The question before their Lordships of the Madras High Court was whether, in the facts and circumstanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s were not valid and the partnership was not genuine. Their Lordships of the Madras High Court answering the question whether the assessee firm was entitled to registration under s. 26A of the Indian IT. Act, 1922, were pleased to observe that if the validity of the gifts cannot be challenged and the subsequent conduct of the parties does support the formation of a genuine partnership, the circumstances that the two partners were the daughters of the assessee, or that they took no active part in the conduct of the business are irrelevant for the purpose of deciding the question. In that view of the matter, the Tribunal was not held legally justified in refusing registration to the firm. In the case of Himalaya Engineering Company v. CIT [1965] 57 ITR 762 (Pat), the question was of two sons being admitted as partners of firm. Registration under s. 26A of the 1922 Act was refused on the ground that the deed was a sham, as no capital was contributed by the new partners, and the change in the constitution of the firm was not notified to the banks in which the old firm had accounts. Despite these shortcomings, their Lordships of the Patna High Court were pleased to hold that there was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ember 13, 1951. In the year 1957, C purchased a broker's card on the stock exchange and, as such, he was prohibited from being a partner of firm which had business in the stock exchange. C accordingly retired from the firm and a new firm called MJ continued the business of the old firm under a partnership deed dated January 8, 1958. The partners in the new firm M J were M, his four major and two minor sons and two sons of C. The shares which C and his two sons together held in the old firm were allotted to the two sons of C in the new firm. Besides that, the bank account of the new firm was opened not in the name of the firm, but the title of the account was M and C Jt. A/c. The explanation that it was so done with a view to obviate the objection raised by the bank that certain credit facilities which were till then available to the earlier partnership would not be available unless C's name was associated, was not considered to be satisfactory for not opening the account in the name of the new firm. Apart from it, though 'C' was said to have retired from the erstwhile partnership, his retirement had not caused any loss to the group of partners belonging to C in the matter of percen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inancing and managing partner of the business, the goodwill belonged to him, and the rest were admitted only as working partners contributing labour. Discussing the various clauses of the partnership agreement, the High Court held that no relationship of partners, is understood in law, had been created as between the parties under the partnership deed and, therefore, the firm was not entitled to registration. The matter went in appeal before the Supreme Court. Their Lordships of the Supreme Court, reversing the decision of the High Court, held that exclusive power and control by agreement of the parties was vested in one partner, and, the further circumstance that only one partner could operate the bank accounts or borrow money on behalf of the firm was not destructive of the theory of partnership, provided two essential conditions were satisfied, viz., that there should be an agreement to share profits and losses of the business of the firm and that the business must be carried on by all the partners or any of them acting for all. Their Lordships were also pleased to hold that the second condition was also satisfied, even though vast powers of management and control had been given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount. Mr. Joshi has stressed that there could not be any reason for the sale of the business to the ladies. The statements of the two ladies were that they had extra money whereas Ramesh Chandra Moondra did not appear to have any at that time and, therefore, they formed the partnership. Smt. Chandra Kant sold her gold and silver ornaments and invested money in the business. She was already having a deposit account in the business when it was carried on by her husband. That the father-in-law of Smt. Shanta N. Maheshwari could not give satisfactory explanation for the source of Rs. 7,000 said to have been given by him to his daughter-in-law, is not the subject-matter of consideration in the present case. As the circumstances indicate, such a gift was not unnatural and the income-tax authorities have also not suspected the correctness of accounts maintained by the firm. In the case of Chitra Cinema v. CIT [1972] 86 ITR 203 (All), their Lordships of the Allahabad High Court were pleased to observe that the fact that the reasons given for arriving at a partnership agreement is wrong may be taken into consideration with other circumstances for coming to the conclusion that the agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne." These clauses clearly disclose that the partners had taken over the business and Ramesh Chandra Moondra was looking after the said business not in his own right but in the capacity of an employee and by virtue of the authority given by the partners, who had the right to take policy decisions. The Tribunal attached much importance to the fact that the two ladies had limited education and they had little or no knowledge about the business carried on by the firm. These factors should not come in the way of the partners claiming registration, because there is nothing illegal in getting the business conducted through some person employed by the partners or by someone authorised by them. The income-tax authorities should not have misconstrued the provisions of the partnership deed upon irrelevant considerations. Correct it is that mere registration of a firm under the Partnership Act will not entitle the firm, as of right, to be registered under s. 185 of the I.T. Act, 1961, because the question of tax is involved The income-tax authorities are of course expected to take into consideration the facts and circumstances of a given case to find out whether in the garb of a sham tran ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
