MAHAVIR INDUSTRIAL WORKS v. COMMISSIONER OF INCOME TAX
[Citation -1984-LL-0326-1]

Citation 1984-LL-0326-1
Appellant Name MAHAVIR INDUSTRIAL WORKS
Respondent Name COMMISSIONER OF INCOME TAX
Court ITAT
Relevant Act Income-tax
Date of Order 26/03/1984
Assessment Year 1974-75
Judgment View Judgment
Keyword Tags grant of registration • reason to believe • protective basis • partnership act • sole proprietor • lady partner • minor child • benamidar
Bot Summary: The ITO held that the said firm was not genuine and was not entitled to the grant of registration for the accounting year 1973-74. The ITO granted registration on a protective basis on the ground that Kailashchandra was not a partner in the firm. Sub-s. of s. 184 of the I.T. Act deals with registration of firms according to which an application for registration of a firm for the purposes of the Act may be made to the ITO on behalf of any firm if, the partnership is evidenced by an instrument, and the individual shares of the partners are specified in that instrument. Section 185 of the said Act deals with the procedure on receipt of application of which sub-s. provides that- On receipt of an application for the registration of a firm, the Income- tax Officer shall inquire into the genuineness of the firm and its constitution as specified in the instrument of partnership, and- if he is satisfied that there is or was during the previous year in existence a genuine firm with the constitution so specified, he shall pass an order in writing registering the firm for the assessment year; if he is not so satisfied, he shall pass an order in writing refusing to register the firm. 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- of any other partner to whom the first-mentioned partner does not stand in the relationship of a spouse or minor child; or 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 Income-tax Officer in the prescribed manner. Thus, Kailashchandra withdrew himself from the front line of action and kept himself in the background so that he could plan and execute the business from behind and that by virtue of the general power of attorney, the entire business of the partnership firm was entrusted to Kailashchandra who was to decide everything including the fact from whom the purchases were to be made and to whom the sales were to be made. Shri G. M. Chaphekar, learned counsel for the assessee, M/s Mahavir Industrial Works, Indore, contended that neither the ITO nor the Tribunal has given any finding that the amount invested in the said partnership for carrying on its business was not invested by the lady partner, namely, Darshandevi, nor is there any finding that profits or income derived from the business of the said partnership was used only by Kailashchandra as the manager of the said partnership firm.


JUDGMENT JUDGMENT judgment of court was delivered by MULYE J.-The Income-tax Appellate Tribunal, Indore, at instance of assessee, has made this reference under s. 256(1) of I.T. Act, 1961, to answer following question: " Whether, on facts and in circumstances of case, there was any material before Tribunal for holding that no genuine firm had come into existence? " facts giving rise to this reference as per statement furnished by Tribunal may be stated in brief thus: On strength of partnership deed executed on October 20, 1971 (annexure-E), between Smt. Darshandevi, w/o Shri Kailashchandra Agrawal, and Shri Rajendrakumar and Shri Ashok Kumar, sons of Shri Kailashchandra Agrawal, assessee-firm, M/s. Mahavir Industrial Works, Indore, claimed registration of firm under s. 185 of I.T. Act, 1961, for accounting years 1973-74 to 1976-77. ITO examined claim and found that Shri Kailashchandra, husband of Shrimati Darshandevi and father of other two partners, who was given general power of attorney dated October 25, 1971 (annexure-F), was de facto proprietor of assesseefirm and assessee-firm was only benami concern of Shri Kailashchandra. ITO, therefore, held that said firm was not genuine and was not entitled to grant of registration for accounting year 1973-74. ITO, however, granted registration on protective basis on ground that Kailashchandra was not partner in firm. This order of ITO was, however, cancelled by Commissioner under s. 263 of I.T. Act and he directed ITO to pass fresh order. In pursuance to directions of Commissioner, ITO examined assessee's claim for registration. He examined Shri Kailashchandra and found that three partners of firm executed general power of attorney on October 25, 1971, in favour of Kailashchandra and by virtue of various clauses of said general power of attorney, Kailashchandra was given absolute powers for conduct of business of firm. ITO, therefore, considering statement of Kailashchandra as also terms and conditions of general power of attorney, came to conclusion that in fact Kailashchandra was proprietor of business carried on in name of M/s. Mahavir Industrial Works, Indore, and that no genuine partnership firm had been brought into existence as claimed by assessee. He, therefore, refused to grant registration to firm as claimed, took status as firm not entitled to registration and, at same time, held that Kailashchandra was sole proprietor of business and subjected entire income to tax in his personal assessments. Against findings of ITO, assessee went in appeal and before AAC it was argued that general power of attorney in favour of Kailashchandra was given to enable manager to negotiate contracts with Government and public sector undertakings. It was also pointed out that in said power of attorney it was nowhere stated that partners were divested of their own rights in firm and that it was clear that Kailashchandra will not be in position to tamper with fundamental constitution of firm and partners' rights in its assets. AAC accepted contention of assessee, cancelled ITO's order under s. 185 of I.T. Act and directed him to allow registration to said firm. Aggrieved by order of AAC, Department filed appeal before Tribunal which after considering contentions of parties came to conclusion that no genuine firm came into existence and entire business was being run by Kailashchandra Agrawal as sole proprietor of firm. It is in these circumstances that this reference has been made to this court at instance of assessee. decision in this case will affect decision in Misc. Civil Case No. 211 of 1983 (Kailashchandra Agrawal v. CIT) in which on basis of finding that Kailashchandra was proprietor of business carried on in name of M/s. Mahavir Industrial Works, Indore, subjected entire income to tax in his personal assessments. Sub-s. (1) of s. 184 of I.T. Act deals with registration of firms according to which application for registration of firm for purposes of Act may be made to ITO on behalf of any firm if, (1) partnership is evidenced by instrument, and (ii) individual shares of partners are specified in that instrument. In present case, admittedly, there is written deed of partnership dated October 20, 1971, duly signed by partners and individual shares of partners have also been specified therein according to which individual share of Darshandevi is 50 per cent. and that of other two partners, namely, her sons, is 25 per cent. each. Therefore, necessary ingredients are satisfied in this case. Section 185 of said Act deals with procedure on receipt of application of which sub-s. (1) provides that- " (1) On receipt of application for registration of firm, Income- tax Officer shall inquire into genuineness of firm and its constitution as specified in instrument of partnership, and-- (a) if he is satisfied that there is or was during previous year in existence genuine firm with constitution so specified, he shall pass order in writing registering firm for assessment year; (b) if he is not so satisfied, he shall pass order in writing refusing to register firm. Explanation.-For purposes of this section and section 186, firm shall not be regarded as genuine firm if any partner of firm was, in relation to whole or any part of his share in income or property of firm, at any time during previous year, benamidar-- (a) of any other partner to whom first-mentioned partner does not stand in relationship of spouse or minor child; or (b) of any person, not being partner of firm, and any of other partners knew or had reason to believe that first-mentioned partner was such benamidar and such knowledge or belief had not been communicated by such other partner to Income-tax Officer in prescribed manner." In present case, ITO as also Income-tax Appellate Tribunal felt that because Kailashchandra has been given unlimited powers by partners in general power of attorney which they have executed, he is de facto proprietor of said partnership-firm and, therefore, he is benamidar. They also took this fact into consideration that previously Kailashchandra had been employee of said firm from 1956 to 1964 that in 1964 he became partner with 40 per cent. share along with his wife, Darshandevi, and in this status he continued as partner up to October 20, 1971, that after October 20, 1971, Kailashchandra chose to become manager of concern after withdrawing himself from partnership and allowed his sons to become partners. Thus, Kailashchandra withdrew himself from front line of action and kept himself in background so that he could plan and execute business from behind and that by virtue of general power of attorney, entire business of partnership firm was entrusted to Kailashchandra who was to decide everything including fact from whom purchases were to be made and to whom sales were to be made. They also relied on testimony of Kailashchandra wherein he has stated that his wife never directed him in matter of sales and purchases and that he carried on all routine tasks and no complicated matter ever arose. On basis of these facts, it was found that no genuine firm had been brought into existence. Shri G. M. Chaphekar, learned counsel for assessee, M/s Mahavir Industrial Works, Indore, contended that neither ITO nor Tribunal has given any finding that amount invested in said partnership for carrying on its business was not invested by lady partner, namely, Darshandevi, nor is there any finding that profits or income derived from business of said partnership was used only by Kailashchandra as manager of said partnership firm. He also submitted that previously when he was partner in said firm in which capital was invested by other partner, Darshandevi, his wife, partnership was treated and registered as genuine one even though actual business was carried on by Kailashchandra. He, therefore, submitted that, in absence of any finding that capital invested in said that, in absence of any finding that capital invested in said partnership firm was that of Kailashchandra, question of treating him as benamidar did not arise because in case of benamidar there must be some evidence and material on record to indicate that in fact investment made actually belongs to Kailashchandra in name of his sons or wife who are partners in present firm and, consequently, merely on basis of general power of attorney, it could not be assumed and concluded that said Kailashchandra was sole proprietor of said partnership firm and that, therefore, partnership firm is not genuine one. learned counsel for assessee also submitted that under provisions of Contract Act as also under provisions of Partnership Act, it is not necessary that each partner should physically carry on business of the, firm and that they have authority to appoint manager who can look after affairs of firm but that does not mean that by appointing such manager they lose their control over affairs of partnership business, because if they have right and authority to give general power of attorney to their manager, they have also right and authority to revoke and cancel said power of attorney and, therefore, by no stretch of imagination, in absence of any other material on record, it could be held that said partnership firm was not genuine firm. learned counsel for assessee in support of his submission placed reliance on decisions in CIT v. Sivakasi Match Exporting Co. [1964] 53 ITR 204 (SC) and CIT v. A. Abdul Rahim and Co. [1965] 55 ITR 651 (SC), which are decisions of Supreme Court prior to amendment made in s. 185 of I.T. Act by which Explanation was added to that section on basis of these two decisions. He, therefore, submitted that even on basis of Explanation added to this section, in absence of any material on record, there was no justification for holding that said firm is not genuine firm and in support of his submission he placed reliance on decisions in United Patel Construction Co. v. CIT [1966] 59 ITR 424 (MP), Nagaland Liquor Stores v. CIT (1978] 115 ITR 615 (Gauhati) and K. D. Kamath and Co. v. CIT [1971] 82 ITR 680 (SC), which fully support case of petitioner-assessee. As against this, learned counsel for Revenue, Shri R. C. Mukati, relying on Kumar Financing Corporation v. CIT [1980]122 ITR 192 (Cal), and also relying on wordings of Explanation added to s. 185 of I.T. Act, 1961, contended that as general power of attorney has given unlimited and sweeping powers to manager, Kailashchandra, as is clear from terms and conditions thereof as also from testimony of Kailashchandra, this material in itself was sufficient to come to conclusion that assessee-firm is not genuine firm. After hearing learned counsel and after going through caselaw cited as also necessary papers, we have reached conclusion that reference must be answered in favour of assessee and against Department. deed of partnership suggests that two male members are working partners and capital is invested by lady partner in whose name business was carried on till assessment year 1972-73. It is also clear, as was argued, that power of attorney was given to enable manager to negotiate contracts with Government and public sector undertakings and that terms and conditions of power of attorney nowhere indicate that partners are divested of their own rights in said firm, but on contrary clause (6) of said document makes it clear that Kailashchandra Agrawal will not be in position to tamper with fundamental constitution of firm and partners' rights in its asset. Thus there is no material on record on basis of which it could be legitimately inferred that Kailashchandra was de facto proprietor of said partnership firm. As result of aforesaid discussion our answer to question referred is that there was no material before Tribunal for holding that no genuine firm had come into existence. reference is answered accordingly with no order as to costs *** MAHAVIR INDUSTRIAL WORKS v. COMMISSIONER OF INCOME TAX
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