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TMI Blog1988 (4) TMI 88X X X X Extracts X X X X X X X X Extracts X X X X ..... ned the relevant fact but also recorded the statements of the three partners which included two ladies. On the basis of these enquiries the ITO proceeded to disallow registration to the firm. He also opined that the firm was a benami of another firm, viz., M/s. Vijeta Industries. The relevant observations of the ITO as reproduced from the assessment order are as under: "During the course of assessment proceedings it is seen that the assessee firm consists of 3 partners which are relating to the partners of M/s Vijeta Industries in the following manner: . M/s Vijeta Industries . This firm's partner . Relation 1 Chhaganlal Trikamalal 1/3rd Narmadeben Chhaganlal 1/3 Wife 2. Mansukhlal Gordhandas 1/3 Chandrakant Gordhandas 1/3 Brother of partner 2 & 3 3. Ratilal Gordhandas 1/3 Lalitaben Ratilal 1/3 Wife Secondly it is seen that the business premises and factory building of both the firms are situated in the same building, the Accountant is also same. The administration of the firm is governed by none of the partners of the firm. But by somebody else. The statement of all the partners of the firm are recorded on summons. The lady partners have shown quite ign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above agreement is scrutinised in detail, it becomes very clear that, as is indicated in cl. 18 of the agreement, this agreement was to be kept with M/s Vijeta Engg. Works. It is not known as to how the agreement which is claimed to be entered between Shri Tribhovan Dayalji and Shri Chandrakant Gordhandas was to be kept with M/s Vijeta Engg. Works. Further, it is not known as to why Shri Ratilal Gordhandas also signed the agreement entered into by the above two persons. It was further noticed that the stamp-paper on which this agreement was entered into was purchased in the name of Shri Ratilal Gordhanda, a partner of old firm and later on just to give a colour of genuineness, some changes were made. To decide the issue it is very necessary to go through the depositions given by the three partners of the appellant firm because the question of genuineness of each firm depends upon its peculiar circumstances. Some of the questions and answers given by Smt. Lalitaben Ratilal are reproduced as below: xx xx xx xx xx xx xx xx xx xx xx xx The questions and answers given by Smt. Narmdaben Chhaganlal which are relevant for deciding the present appeal are also reproduced as be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... brother of first two partners of the old firm is taken and the wives of two partners of the old firm are taken as partners in the new firm. In control and in the case of the appellant firm also business is conducted from the same premises and the partners of the old firm are controlling the business. In the case of Shri Dhanji Lalji vs. CIT (1977) 107 ITR 397 (Bom), the Bombay High Court held that each one of the circumstances taken itself might not be sufficient to lead to an inference about the non-genuineness of the firm but that does not mean that taking all the circumstances and factors cumulatively, such an inference can never be drawn. In the case of the appellant firm, if we examine the depositions of the three partners, the only conclusion that can be drawn is that none of the partners is a genuine partner and they are simply benamidars of the partners of the old dorm. One more important point was noted by me that regarding the capital contribution of Smt. Narmadaben Chhaganlal, her husband gave a statement that an amount of Rs. 5,000 was advanced by Shri Gangji Lalji, father of Smt. Narmadaben. However, when the Inspector visited Shri Gangji Lalji and inquired of him abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aware of the complete and minor details of the business, but both of them had specifically stated that they had invested capital out of their own sources in the partnership firm and Shri Chandrakant was the third and active partner of the firm and it was he who knew about the business activities of the firm. That even Shri Chandrakant Gordhandas specifically stated in his deposition that he was in charge of the management of the firm and was also working as a "turner." That his investment in the partnership firm had also been accepted by the ITO. That the ITO had specifically mentioned in an office note appended to the assessment order that the capital introduced by all the partners stood properly explained. (5) That the new firm was engaged in an independent activity of manufacturing although it was also engaged in doing job work on behalf of the old firm. That the rates paid to the new firm by the old firm were never doubted by the Department and the entire job work was done at arms length. (6) That the new firm had incurred separate expenses under various heads such as establishment, factory rent, factory expenses, stationary, staff salary, etc. And had also acquired its own ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anced arguments pertaining to the "benami" aspect of the matter in so far as the income had been clubbed in the hand of the old firm. These were as under: (1) That the burden of proof was squarely on the Department to prove that the new firm was the "benami" of the old firm. (2) That some of the tests laid down for establishing the benami nature of a transaction were not fulfilled in the present case. These tests, according to him were: (i) Source of investment; (ii) Possession of assets; (iii) Position of the parties; (iv) Motives; and (v) Conduct of the parties. That the source of investment of the partners was fully established and accepted by the ITO assessing the new firm. That no active role was played by the partners of the old firm in the business and manufacturing activities of the new firm. That the assets and properties of the new firm were in the exclusive possession of its partners and even the business was carried on at a different place. That there was no whisper in the orders of any of the lower authorities as to there being any motive for establishing the new firm. That the income of the old firm was moderate and no motive could be attributed for cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partmental Representative relied on the following authorities: (i) S.P. Gramophone Co. vs. CIT (1974) 97 ITR 532 (P&H) (subsequently affirmed by the Supreme Court in (1986) 51 CTR (SC) 104 : (1986) 158 ITR 313 (SC)); (ii) Sree Balajee Rice Working Co. vs. CIT (1980) 15 CTR (AP) 233 : (1980) 3 Taxman 160 (AP); (iii) R.S. Balasubramania Mudaliar vs. CIT (1952) 22 ITR 370 (Mad). He was also of the view that the decision cited on behalf of the assessee were not strictly applicable since they were distinguishable on facts. He also referred to the relevant points of the statements of the partners as also some of the other documents appended in the paper book filed by the assessee in support of his arguments. 14. In reply the assessee's counsel made the following submissions: (1) That it was not the case of the ITO that the new firm had been created with a view to reduce the income of the old firm. (2) That the partners of the old firm were not examined by the ITO before concluding that the new firm was a "benami" of the old firm (3) That the business of both the firms was different and it was an admitted fact that the new firm was also engaged in an independent manufactur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lal Gordhandas partner of the old firm and "was to be kept with M/s Vijeta Engg. Work's." He also found that the stamp paper on which the agreement had been entered into had been purchased in the name of the said Shri Ratilal Gordhandas. Tha AAC also considered the shifting stand taken by the father of one of the lady partners Smt. Narmadaben on an inquiry being made by the IT Inspector regarding a sum of Rs. 5000 which was the capital contribution of the lady. 19. The AAC in his order also referred to the depositions of the partners and reproduced the relevant portions. According to him the decision of the Hon'ble Supreme Court in the case of Laduram Taparia was fully applicable. 20. Taking into account the relevant facts we are of the view that there is no legal bar on persons closely related to each other to engage in independent business activities of identical or different nature. A new firm coming into existence should not necessarily be suspect on this ground only. 21. We also find from record that the "new firm" in addition to undertaking labour jobs on behalf of the old firm was also engaged in the separate activity of manufacturing "liner Pistons." This has been spe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the assessee could have purchased a stamp paper in its own name and then also entered into a similar agreement may be without being suspected in the eyes of the Revenue. The partner of the old firm had countersigned the agreement merely because the stamp paper was in his name. This however did not make him a party to the document which in practice remained between the new firm and the landloard. 24. Another aspect of the matter referred to by the ITO is the common Accountant for maintaining the books of accounts of both the firms. According to us this is a common practice in small businesses and need not be discussed any further. 25. The next important aspect is the finding of the lower authorities that the lady partners were not engaged in the business and nor was the remaining male partner aware of the affairs of the business. We must say that initial doubts can be created but only if some of the questions and answers are perused individually. The depositions have to be read as a whole. It is also to be appreciated that they are being recorded after a lapse of nearly four years and it is not expected that each and every minor detail would be remembered. The two lady partn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e IT Inspector made with the father of one of the lady partners, namely, Smt. Narmadaben. This aspect of the matter has been referred to in the order of the AAC. We also find on the evidence available on record that no funds of the appellant firm came from the coffers of the old firm. A perusal of the balance sheet of the assessee firm clearly proves this fact. The ITO has not even doubted the transactions between the old firm and the assessee firm in so far as it related to the labour work carried out by the assessee firm on behalf of the old firm. There is no evidence on record to show that the new firm was created with a view to divert a part of the income of the old firm since none of the two firms were having income of a very high magnitude. We were in fact informed during the course of the hearing that the assessee firm lasted only for a period of 3 years. We have also not come across anything to show that the partners of the old firm were in enjoyment of the funds earned as profits by the new firm. Further there is nothing to show that the assets of the new firm were in the possession or enjoyment of the old firm or any of its partners. According to us these were some of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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