TMI Blog1996 (1) TMI 143X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer) on 7-11-1985. Clause-7 of the partnership deed provides that profits and losses (including capital profits and losses) shall be divided between the partners in the following shares :---- Name of Partners Share in ----------------------------- Profit Loss ------------------------------------ 1. Shri Bhikhoobhai Nagindas Shah 7.33% 2. Shri Kantilal Chandulal Shah as Karta of his HUF 8.331/2% 3. Shri Maheshbhai Nagindas Shah 7.45% 4. Shri Babubhai Chimanlal Shah as Karta of his HUF 8.00% 5. Smt. Namitaben Virendrabhai Shah 7.67% 6. Shri Raj Bhikhobhai Shah as a member representing Shri Sukun Enterprise (AOP) 8.00% 7. Smt. Maltiben Dineshbhai Shah 7.44% 8. Smt. Ashaben Jayendrabhai Shah 7.45% 9. Smt. Kalpanaben Kamleshkumar Shah 8.66% 10. Shri Umesh Kantilal Shah 8.331/2% 11. Shri Vipool Bhikhoobhai Shah as a member representing Shri Roosabha Associates (AOP) 8.00% 12. Shri Dipakbhai Anubhai Shah 3.00% 13. Shri Jagdishbhai Kantilal Shah 2.00% 14. Shri Bimalbhai Jagdishbhai Shah 3.33% 15. Shri Rajendra Chandulal Mahta 1.33% 16. Smt. Vimlaben Nagindas Shah 2.67% 17. Shri Amratlal Maganlal Patel as Karta of hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arta of his HUF 8% 2. Smt. Namitaben Virendra Shah 7.67% 3. Smt. Maltiben Dineshbhai Shah 7.44% In place of the above retiring partners, three new partners had been admitted to the partnership under the present deed with the sharing ratio as under :---- 1. Shri Rajesh Babubhai Shah 7.37% 2. Shri Dinesh Nagindas Shah as Karta of his HUF 7.45% 3. Shri Utkarsh Bhikhubhai Shah 8% There was also reshuffling of sharing ratio amongst the continuing partners. 6. The Assessing Officer refused registration to the assessee-firm for assessment year 1988-89 also in view of the elaborate reasons given in the order passed under section 185(1)(b) of the Act placing reliance on the reasons recorded in the order passed for assessment year 1987-88. Apart from that he observed that Sri Dinesh Nagindas Shah was admitted as a partner representing his HUF with 7.45% shares without contributing any capital in the firm's business. This was an additional reason given in the order passed for assessment year 1988-89 to support his refusal to grant registration. The Assessing Officer also relied upon various decisions mentioned in the said order. 7. In assessment year 1989-90, there w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted his written submissions dated 11-12-1995 which are reproduced hereunder : " Assessment year 1987-88 Registration was refused this year under section 185(1)(b). Facts are discussed on pages 2 onwards of the combined order under sections 143(3) and 185(1)(b). The partners included inter alia two A.O.Ps. each having one minor with 9596 shares in the profits and losses of his respective A.O.P. from partnership in the assessee-firm. Thus, the minors in the two A.O.Ps. were virtually owners of the interests of the respective A.O.Ps. in the firm and these minors were exposed to the liability to losses arising from the firm. Since these two A.O.Ps. were partners through their respective adult members in the assessee-firm, the said adult members were benamidars of their respective A.O.Ps. qua their respective interests in the assessee-firm. Form No. 12A having not been filed, registration was refused. The CIT(A) directed to grant registration. The first issue in the appeal, therefore, is whether the firm was entitled to registration in spite of the fact that the A.O.Ps. with their respective 95% interests belonging to minors were full-fledged partners in the firm so as to exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as that of a guardian to a minor or of an attorney to the real owner and so on. The argument on the assessee's behalf in relation to the department's part of onus could very well compare with the assertion in a hypothetical case by a thief that when all the ingredients which constitute the offence are already provided or disclosed by the thief himself, the burden by prosecution remains undischarged. To elaborate, the main issue could be split into two smaller issues. The first one is whether the relationship of benamidari did exist on the facts of the case. For this purpose one has to go into what constitutes a benamidar. The word benami with its Persian origin could be broken into two parts, viz., " Be " meaning thereby " without " and " Nami " meaning thereby " of name ". Thus benami would literally mean " without name " or " without the correct name " or " with a fictitious name." Hence, in the partnership firm two A.O.P. partners are without their correct names or the said A.O.Ps. are partners in the benami names of their respective representative adult members. Returning to the onus part, it may be submitted that the Courts have held that certain facts and circumstances shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... special law, i.e., The Companies Act. For an Association of Persons on the other hand, there is no special law regulating the inter se relationships of its members and their respective capacities to bind the other members. It has only been made a mere assessable entity for purposes of income-tax if the facts and circumstances of any case warranted the fitting in of such an A.O.P. to be so assessee for income-tax purposes. Accordingly, an A.O.P. has no escape from the obligation of filing of Form No. 12A in case it intends to become a partner through any of its members. (ii) The next argument on the assessee's behalf is based on the decision of the Hon'ble Gujarat High Court reported on 128 ITR 747. This decision was given by the Hon'ble High Court following Supreme Court's decision in Murlidhar Jhavar's case. The later involved interpretation of provisions of 1922 Act, according to which the Assessing Officer could assess either a partnership firm or its partners and once he chooses to assess the partners individually, he could not assess the firm. Under the 1961 Act, however, both the firm as well as its partners are separately assessable and therefore Murlidhar Jhavar's case wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng when two or more persons agree to share .... and so on. Thus, agreement for purposes of section 4 of the Indian Partnership Act should also be as laid down under the Indian Contract Act. For an agreement or contract to be valid for purposes of section 25 of the Indian Contract Act there should be the consideration for every contract. Insofar as partnership firms are concerned, every partner is required to put in his part of consideration in the form of capital, labour or skill or more than one of these in order that he entitles himself to the right to share the profits from the partnership business and also to the surplus in the event of dissolution of or retirement from the firm. An HUF is undoubtedly incapable of possessing any skills nor it is amenable to put in its labour as its own part of consideration to the firm. It is only capital, i.e., something of monetary value which constitutes a valid consideration from the side of a HUF in order to become a partner in a partnership firm through its Karta or any other adult member. It was argued on behalf of the assessee that the said HUF had vast experience in the line of coal ash business. This is a contradiction in terms as an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly generalised statutory connotations to cover up defect entities coming into being in the natural course of things and not entities floated by design by tax planners in the absence of a special law (as in para (i) pages 4-5 ante) where Mcdowell rule shall apply." 12. Shri J.P. Shah, ld. counsel for the assessee submitted written submissions which are reproduced below :-- " I. Section 185(1) -- Explanation clause (b) The Department must prove two things : (i) that a partner is a benamidar of any person other than partner ; and (ii) any of the other partners knew or had reason to believe that so and so apparent partner was such benamidar. On the above two conditions being fulfilled, the partner who had such knowledge or reason to believe has a duty to communicate such knowledge or belief to the Assessing Officer in Form No. 12A. In the submission of the assessee, the department has not discharged such onus. On the contrary, on the facts of the case there is no benamidar partner and if there was any, no partner knew or had reason to believe so. II. Benami (1) Controller v. Aloke Mitra 126 ITR 599, page 600, last para of Head Note, third line : " A benamidar has no int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT v. Vellingiri Gounder 24 ITR 166 (Mad.), per Bhagwati, CJ., (as he then was) : "The view taken in this decision has held the field for about 20 years and even if two views are possible we do not think that we would lightly depart from a view which consistently held the field." (10) In CIT v. Karnaji Lumbaji 74 ITR 343, the Gujarat High Court held that " this undertaking to share losses and the liabilities of the firm is also consideration " and the same High Court in Achalsinhji Keshrisinhji Co. v. CIT 157 ITR 537 held that " even promise to invest is a sufficient consideration." (11) In a Supreme Court case Firm Bhagat Ram Mohanlal v. CEPT 29 ITR 521 it was observed : " It is not in dispute that Mohanlal was the Karta of the joint family and that he entered into the partnership as such karta. It is well settled that when the karta of a joint Hindu Family enters into a partnership .... The creditors of the firm would no doubt be entitled to proceed against the Joint Family assets including the shares of the non-partner coparceners for realisation of their debts. But that is because under the Hindu law, the karta has the right when properly carrying on business to pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made by the ld. representatives of the parties. It is neither proper nor necessary to reproduce the detailed arguments made by them as all the points argued by them have been very ably summarised by both of them without missing the essence of its being complete in itself. Reference to their oral arguments as and when necessary will be made while giving our findings in the subsequent paragraphs. 14. We have considered the rival submissions made by the learned representatives of the parties. We have gone through the orders of the ld. departmental authorities and various other documents to which our attention was drawn by the ld. representatives during the course of hearing. We have also carefully gone through all the judgments/various decisions cited by the ld. representatives at the time of hearing. We have also carefully studied the photo copies of relevant pages submitted by the ld. representatives from various commentaries such as the law of Benami Transactions, Indian Trust Act, Transfer of Properties Act and other relevant laws. 15. The ld. D.R. placed heavy reliance on the judgment of Hon'ble Supreme Court in the case of S.P. Gramophone Co. v. CIT [1986] 158 ITR 313 durin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure to do so would necessarily result in refusal to grant the registration. 17. Therefore, we will have first to consider whether the two partners who joined the said firm as partners on behalf of their respective AOPs could be treated as benamidar of any person other than a partner of the firm as mentioned in clause (b) of Explanation to Section 185(1). It will be worthwhile to reproduce the Explanation to Section 185(1) : Explanation -- For the purposes of this section and section 186, a firm shall not be regarded as a genuine firm if any partner of the firm was, in relation to the whole or any part of his share in the income or property of the firm, at any time during the previous year, a benamidar---- (a) of any other partner to whom the first-mentioned partner does not stand in the relationship of a spouse or minor child, or (b) of any person, not being a partner of the firm and any of the other partners knew or had reason to believe that the first mentioned partner was such benamidar and such knowledge or belief had not been communicated by such other partner to the Assessing Officer in the prescribed manner. The communication as contemplated under clause (b) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... F or the trust or other group of individuals and a benamidar representative partner may often be very thin and it may be very difficult in cases like this to determine as to whether such a representative partner would come within the meaning and scope of expression of benamidar. We will, therefore, like to examine this legal contention with the help of some of the relevant judgments which were cited before us during the course of hearing. 20. The Hon'ble Supreme Court in the case of CED v. Aloke Mitra [1980] 126 ITR 599, inter alia, held as under : "In the case of a benami transaction, the real owner has got the title though the property is in the name of the benamidar. The real owner can deal with the property without reference to the latter. A benamidar has no interest at all in the property standing in his name. From the fact that, if a person purchases from a benamidar, the real owner cannot recover unless he shows that the purchaser had actual or constructive notice of the real title, it does not follow that the benamidar has real title to the property : he is merely an ostensible owner thereof." 21. The Hon'ble Karnataka High Court in the case of CIT v. Manickbag Gara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or in any other fiduciary character. A guardian cannot be said to be the ostensible owner with the consent, express or implied, of the minor. As between members of a joint Hindu Family the fact that the name of one member is used in acquisition of the property does not amount to the holding out of that member as the ostensible owner, and a person dealing with one such member can hardly say that he was misled unless he proves that he had made full inquiries and could not ascertain his title." 24. It will also be relevant and appropriate to go through the Notes on Clauses of the Taxation Laws (Amendment) Bill, 1973 with a view to understand the Legislative intent of introducing such an explanation to section 185. Clause 52 of the said Notes on Clauses as appearing in (1973) Volume 89 page -- 115 is reproduced hereunder : " Clause -- 52 This clause seeks to amend section 185 of the Act so as to provide that if a partner in a firm is an undisclosed benamidar of an outsider and any one or more of the partners had knowledge thereof, the firm shall not be treated as a validly constituted firm." 25. The aforesaid Notes on Clauses clearly indicates that the said explanation was me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resentative capacity on behalf of the HUF. Circular No. 224 dated 22nd June, 1977 further clarifies that where a coparcener other than a Karta of HUF is a partner in a firm on behalf of his HUF, he cannot be regarded as a benamidar of the HUF and as such there is no obligation to file form no. 12A in such cases. These circulars have been published at page no. 4205 of Income-tax Law by Chaturvedi Pithisaria, Volume 4 and copies thereof have also been submitted by the ld. representatives of the assessee in the compilation submitted before us. Likewise the CBDT has also issued one more circular No. F. No.220/46/76 ITA-II in which it has been clarified that when a trustee becomes a partner in his representative capacity on behalf of the trust, he does not become a benamidar and hence it will not be necessary for the firm to file Form No. 12A in such cases. It is evident from the aforesaid Circulars issued by CBDT that the law does not require in all cases, where some of the partners have joined as partners in their representative capacity, to file Form No. 12A but such compliance is required to be made only in a case where the partner is a benamidar of another person. This necessaril ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and the genuineness of the firm where other kinds of representative partner (other than benamidar) becomes a partner in their representative capacity such as a Karta on behalf of HUF, a trustee on behalf of a trust, a member on behalf of an A.O.P. or other kind of a group of persons under an agreement express or implied between the members thereof. 30. In view of the aforesaid discussions, we are of the considered opinion that the two adult members who joined as partners in the assessee-firm on behalf of their respective A.O.Ps. cannot be regarded as benamidars as contemplated in the Explanation to section 185(1) and, therefore, the firm was under no obligation to file Form No. 12A. 31. We will now consider the other point raised by the ld. representatives of the parties during the course of hearing namely as to whether the two A.O.Ps. consisting of only two members -- one major (adult member) having 5% shares and the other (being the minor member - represented by his guardian and having 95% shares in profits and losses) can be regarded as a legally valid A.O.P. or such an A.O.P. which has made the minor also liable for losses and liabilities to the extent of 95% should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of CIT v. C. Karunakaran [1988] 170 ITR 426 at page 430 have considered the question relating to validity of A.O.P. where all but one of the sons were minors and who were the members of an A.O.P. carrying on business. The extract from the decision is as under :--- " The fact that all but one of the sons in this case were minors is of no objection when consent to carry on the business together was granted on their behalf by their guardian. When the mother and the daughters relinquished all their rights in the business by a registered document and the sons together carried on the business, the consent of the mother as guardian was easily inferable from the conduct of the parties. In M.M. Ipoh v. CIT [1968] 67 ITR 106, 116, the Supreme Court categorically stated that there was no objection to a minor being a member of an association of persons for the purpose of the Income-Tax Act, 1961." 35. In reply to the aforesaid judgment relied by the ld. counsel for the assessee, the ld. D.R. very ably pointed out that in this very judgment it has been mentioned at page 430 that the judgments in G. Murugesan Bros. case and CIT v. A.P. Parukutty Mooppilamma [1984] 149 ITR 131 (Ker.) do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the destination of profit was also with the A.O.P. also does not help the revenue as all these factors will be available in the case of all representative partners who become partner in their representative capacity. A Karta becoming partner on behalf of HUF or a trustee on behalf of the trust will also contribute capital from the HUF or the trust as the case may be and the destination of profits will also go to the person who is represented by such representative assessee. The distinction has to be drawn between the benamidar and other categories of representative assessees as has been elaborately discussed herebefore. We have already arrived at the conclusion that these adults representing their respective AOPs cannot be held to be benamidars of their respective AOPs as they themselves also have some interests in the respective AOPs which fact coupled with various other reasons given above will exclude them from the category of benamidar. 38. In view of the aforesaid discussions, we are of the considered opinion that the two adult members representing their two respective AOPs were validly taken as partners and they cannot be regarded as benamidars of the two respective AOPs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal is bound to follow the decision of any High Court in the absence of any contrary view expressed by the other High Court(s) or by the Jurisdictional High Court. He also placed reliance on the judgment in the case of Mandal Ginning Pressing Co. Ltd. v. CIT [1973] 90 ITR 332 (Guj.) and contended that at page 347 it was held that the view by the High Court which held the field for over twenty years should be followed even if two views are possible on that point. He also relied upon the judgment of Hon'ble Gujarat High Court in the case of CGT v. Karnaji Lumbaji [1969] 74 ITR 343 in which it was held that undertaking to share losses and the liabilities of the firm will constitute consideration for deciding the validity of a contract. Likewise the Hon'ble Gujarat High Court in the case of Achalsinhji Keshrisinhji Co.v. CIT [1986] 157 ITR 537 has held that even promise to invest is a sufficient consideration. He has also placed reliance on the judgment of Hon'ble Supreme Court in Firm Bhagat Ram Mohanlal v. CEPT [1956] 29 ITR 521 to support his contention that the creditors of the firm would no doubt be entitled to proceed against the joint family assets including the shares of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of profits from the partnership firm to his HUF. The specific mention of such representative capacity of the partner in the partnership deed would constitute an over-riding title over the shares of the Karta in the partnership firm in favour of the members of the HUF. In case the Karta refuses to hand over his share of profits to his HUF, the other members of the family will certainly be entitled to legally compel him to hand over that share of profits from the firm to the HUF and all the members of the HUF will be entitled to enjoy such share of profits. The judgment of Hon'ble Madras High Court in the case of R. Subramania Iyer clearly supports the assessee's case. 44. On the above facts and circumstances of the present case, we are also of the view that the risk of sharing the losses as specified in the partnership deed is one of the important fact which constitutes consideration. Such a view is clearly fortified by the judgment of Hon'ble Gujarat High Court in the case of Karnaji Lumbaji. At page 353, the Hon'ble Gujarat High Court has inter alia clearly held that undertaking to share not only in the assets but also in the liabilities of the firm and the fact that the partn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of the firm. The said representative partner is not only entitled to share in the assets but karta by becoming a partner in his representative capacity has also exposed the HUF to meet liabilities of the firm, if any claim is made by the creditors of the firm against the assets of the HUF. The HUF properties are also liable for meeting the liabilities of the firm. Clause-5 clearly provides that all the partners are liable to contribute capital in the firm as and when the need arises. Clause 6 of the partnership deed also provides that the partners shall be entitled to interest on their respective capital contribution @ 18 1/2% per annum. All these facts like undertaking to share the losses, liability towards the creditors of the firm, are factors which constitute consideration within the meaning of the relevant provisions contained in the Contract Act as well as in the Partnership Act. We are, therefore, of the view that the mere fact that the kartas who became partners in their representative capacity on behalf of their respective HUF did not actually contribute any capital in the years under consideration would not render the partnership illegal either under the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to the appellant-firm refused by the Assessing Officer was confirmed by the ld. CIT(A) in assessment year 1989-90 though for earlier two years namely 1987-88 and 1988-89, the ld. CIT(A) allowed the assessee's appeals and directed the Assessing Officer to grant registration. The main basis for refusal to grant registration are same as in assessment year 1988-89 and the last reason given by the Assessing officer that the firm has been frequently changing the partners year to year, is of a geneal nature. The firm as and when changed the constitution, a fresh deed of partnership was executed and in all the preceding years the firm was registered. All the partners were accepted to be genuine partners. Whenever the change in constitution or change in profit sharing ratio took place in the past such changes in the constitution and/or changes in the profit sharing ratio were duly accepted by the department. The decision in the case of Sameer Builders is not at all applicable to the facts of the present case as the facts of that case are absolutely distinguishable. In that case 174 AOPs were formed on the same date by similarly worded instruments at the same place and by permutation and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court in Kerala Financial Corpn. v. CIT [1994] 210 ITR 129 and 177 ITR 173 (sic). He also placed reliance on the judgment of Hon'ble Gujarat High Court in CIT v. Deepak Family Trust No. 1 [1995] 211 ITR 575 and urged that the departure can be made from the judgment of the High Court if they were sub silentio, i.e., whether such decisions are well known on some crucial points. The ld. D.R. also pointed out that the judgment of Hon'ble Gujarat High Court in the case of Laxmichand Hirjibhai cannot be mechanically applied to all cases where assessment of partners have been completed prior to completion of the assessment of the firm. He cited an instance that a firm consisting of 5 minors and five lunatics which is apparently illegal firm cannot be granted registration even if a partner of an illegal firm has been assessed on the strength of the said judgment of Hon'ble Gujarat High Court. 55. The ld. counsel for the assessee in reply had argued that beneficial circulars are binding upon the departmental authorities. He also placed reliance on judgment in CIT v. Sriram Agrawal [1986] 161 ITR 302 (Pat.) in which it was held that observations in the case of State Bank of Travan ..... X X X X Extracts X X X X X X X X Extracts X X X X
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