Research › Browse › Judgment

Rajasthan High Court · body

1994 DIGILAW 605 (RAJ)

Commissioner of Income-tax v. Rajesh Corporation

1994-08-08

ANSHUMAN SINGH, R.S.VERMA

body1994
Judgment 1. This is an application filed by the Commissioner of Income-tax, Jaipur, under Section 25 6(2) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), for directing the Tribunal to refer the following question to this Court for decision: Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee-firm was entitled to registration under the Income-tax Act, 1961?“ 2. The briefly stated facts giving rise to this application are as under: The assessee, Rajesh Corporation, had applied for registration in Form No. 11. It was stated that there were three partners in the firm, which came into existence with effect from February 1, 1979. The accounting year of the firm ended on June 30, 1979. The Income-tax Officer, however, held that the partnership was not genuine and the two lady partners, Smt. Bhanwar Devi and Smt. Vimla Patni, are not genuine partners, but are benamidars of the male partner, Shri Sirehmal Chopra. He further held that the execution of the instrument of partnership was only a make-believe document. He, therefore, refused registration to the firm and the assessment has been made in the status of an unregistered firm. The Income-tax Officer had found that Shri Sirebmal Chopra was doing business in precious stones and at the time of constitution of the firm on February 1, 1979, he brought in some precious stones valued at Rs. 40,990 as his capital in the firm. Shri Sirehmal Chopra was the son of Smt. Bhanwar Devi and brother of Smt. Vimla Patni, who joined as partners of the firm. The Income-tax Officer found that the two lady partners had not brought in any capital except for a small amount of Rs. 1,000 brought in by Smt. Bhanwar Devi. He also held that Smt. Bhanwar Devi had no experience or skill in this business. She was examined by the Income-tax Officer and from her statement, he inferred that she did not know much about the business and about the profit received by her. 3. She had admitted that Shri Sirehmal Chopra was carrying on her business and sometimes she was only signing the cheques. It was found by the Income-tax Officer that the deposit made in the year relevant for the assessment year, i.e., 1981-82, was only Rs. 5,800 and the partner was shown to have earned a profit of Rs. 3. She had admitted that Shri Sirehmal Chopra was carrying on her business and sometimes she was only signing the cheques. It was found by the Income-tax Officer that the deposit made in the year relevant for the assessment year, i.e., 1981-82, was only Rs. 5,800 and the partner was shown to have earned a profit of Rs. 16,091 as a result of the business of the firm. From the absence of withdrawals, he inferred that the money was being fully used by Shri Sirehmal Chopra. As regards Smt. Vimla Patni also, the Income-tax Officer opined that she had no experience of carrying on business and in her account also there was no withdrawal except for the payment of insurance and income-tax. Thus, according to the Income-tax Officer, no part of profit has gone to the ladies and it has all remained under the control of the male partner, Shri Sirehmal Chopra. It was also noted by the Income-tax Officer that the male partner had a share of 40 per cent. whereas the two ladies have been given a share of 35 per cent. and 25 per cent., respectively, which was quite out of proportion considering that they had not made investment. From the facts stated above, the Income-tax Officer inferred that the partnership was an attempt to divert the income and was a result of collusion between the persons concerned, thus holding the two ladies to be benamidars of the male partners. The Appellate Assistant Commissioner upheld the order of the Income-tax Officer. The assessee feeling aggrieved against the order of the Appellate Assistant Commissioner preferred an appeal before the Tribunal. The members of the Tribunal differed as there was a difference of opinion between the Judicial Member and the Accountant Member. The Judicial Member held that registration could not be granted to the assessee-firm whereas the Accountant Member held that the firm was genuine and registration could not be refused. Since there was a difference of opinion between the Members, a reference was made to the President under Section 255(4) raising the following question: Whether, on the facts and in the circumstances of the case, the authorities below are justified in non-granting of registration to the firm on the ground that the firm is non-genuine and the partnership is a sham on account of the lady partners, the benamidars of the male partner, Shri Sirehmal Chopra ?“ 4. The Vice President agreed with the view taken by the learned Accountant Member to the effect that the material brought on record by the Revenue authorities is not sufficient to hold that the ladies are the benamidars of the male partners and the matter was sent back to the Bench for passing an order in accordance with the decision of the majority. Thereupon the Commissioner of Income-tax filed an application under Section 256(1) of the Act for referring the question stated above, but the said application was rejected by the Tribunal. Thereupon, the petitioner has come to this Court in the instant application. 5. We have heard Mr. G.S. Bapna, learned Counsel for the Commissioner of Income-tax, and Mr. J.K. Rana, learned Counsel for the assessee. Learned Counsel for the Revenue contended that the Tribunal was not justified in rejecting the application under Section 25 6(1) and the question raised by the Department is a question of law which does arise out of the order passed by the Tribunal and as such the Tribunal may be directed to state the case and to refer the question mentioned in the application filed by the Revenue. In support of his contention, he placed reliance on the judgment of the Madhya Pradesh High Court in Doshi Vastralaya vs. CIT [1989] 175 ITR 309. In the aforesaid case, the profit had not been distributed between the two partners in view of the partnership deed, but the facts of the present case are entirely distinguishable from the aforesaid case and, in our opinion, it does not support the contention of learned Counsel for the Revenue. The other case on which he relied is the judgment of the Punjab and Haryana High Court in CIT vs. Kuldip Industrial Corporation [1989] 178 ITR 257. A perusal of the aforesaid case indicates that the question whether the firm was genuine or not was an ancillary question which was not directly in issue and, moreover, the facts of the present case are also entirely different from the aforesaid case. For the reasons stated above, we are of the opinion that the aforesaid two judgments relied upon by learned Counsel for the Revenue are entirely distinguishable and do not apply on the facts of the present case. For the reasons stated above, we are of the opinion that the aforesaid two judgments relied upon by learned Counsel for the Revenue are entirely distinguishable and do not apply on the facts of the present case. On the contrary, learned Counsel for the respondent-assessee has placed reliance on the judgment of the apex Court in Ratanchand Darbarilal vs. CIT [1985] 155 ITR 720. For the purpose of appreciation of the controversy involved in the present case, we think it proper to refer to the brief facts of the case of Ratanchand Darbarilal [1985] 155 ITR 720, 722 (SC 6. One Muralidhar had two sons, Ratanchand and Darbarilal. Ratanchand had two sons, Jaykumar and Abhaykumar, while Darbarilal had one son by name Dhanyakumar. Dhanyakumar had four sons, namely, Keshavkumar, Prasannakumar, Sunilkumar and Sudhirkumar. Branches of Ratanchand and Darbarilal had long before separated. On March 1, 1943, a firm by name Ratanchand Darbarilal was constituted at Katni with Dhanyakumar and Jaykumar as its partners and these two represented their respective families. The firm carried on business in textile goods and in due course, acquired substantial properties out of contributions made by the two Hindu undivided families. In 1950, a separate retail shop by name Premier Cloth Stores was opened at Katni by the firm. Similarly, in 1953-54, a branch was opened at Satna for handling cloth business. On November 1, 1956, under a partnership deed, the Satna business was taken over by a firm consisting of three partners, namely, Dhanyakumar, Jaykumar and Abhaykumar, and the partnership was deemed to have begun from September 9, 1956. Prasannakumar was admitted to the benefits of the partnerships as he was then a minor and the firm’s business at Satna was run in the name of Savai Singhai Ratanchand Darbarilal. On April 1, 1957, under a separate deed, the business at Katni, both the main as also the branch, were taken over by a firm of four partners, viz., Dhanyakumar, Jaykumar, Abhaykumar and Keshavkumar. In the partnership deeds of Satna and Katni, there was no reference to the business at the other place. 7. Separate applications for registration of the two firms in the assessment year 195 8-59 were made. The Income-tax Officer rejected both. The assessee appealed to the Appellate Assistant Commissioner. The refusal by the Income-tax Officer was upheld in appeal. In the partnership deeds of Satna and Katni, there was no reference to the business at the other place. 7. Separate applications for registration of the two firms in the assessment year 195 8-59 were made. The Income-tax Officer rejected both. The assessee appealed to the Appellate Assistant Commissioner. The refusal by the Income-tax Officer was upheld in appeal. The assessee appealed to the Tribunal and contended that the firm at Satna was genuine and the Satna business was totally separate from the business run at Katni from before “There was no need in law for a partial partition of the family before some of the members of the family constituted themselves into a partnership firm. The Tribunal held that there was no sustainable objection against the claim for registration. 8. On an application made by the Revenue, the Tribunal referred the following question only to the High Court (at page 724) “Whether, on the facts and in the circumstances of the case, Ratanchand Darbarilal, Satna, was entitled to registration under Section 26A of the Indian Income-tax Act, 1922, for the assessment year 1958-59.’ 9. However, the Commissioner of Income-tax applied to the High Court for directing the Tribunal to refer three further questions which are not relevant for the purpose of the present case. The High Court entered into the facts of the case and set aside the judgment of the Tribunal holding that the firm was entitled to registration. In the appeal filed by the assessee before the apex Court, the apex Court reversed the order passed by the High Court and restored the order of the Tribunal. The dictum laid down by the apex Court in Ratanchand Darbarilal’s case [1985] 155 ITR 720 was that the question whether a firm is genuine or not is a pure question of fact and not a question of law. We have carefully perused the judgment of the apex Court. We have given our thoughtful consideration to the contentions raised by either party and in view of the judgment of the apex Court in the case of Ratanchand Durbunlal [1985] 155 ITR 720 and we are of the opinion that the question proposed by the Revenue is a pure question of fact and not a question of law. 10. For the reasons stated above, the application filed by the Revenue under Section 256(2) is rejected. 10. For the reasons stated above, the application filed by the Revenue under Section 256(2) is rejected. The parties shall bear their own costs.