MULLA FIDA ALI SULTAN ALI Vs. COMMISSIONER OF INCOME TAX C P U P
INCOME TAX APPELLATE TRIBUNAL
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1. The assessee, Mulla Fida Ali Sultan Ali, submitted his return of income for the year 1934-35 and an application was made under Sec. 26-A of the Indian Income Tax Act for registration of a firm purporting to have been brought into existence by a partnership deed dated 25-7-1932 which was to come into force on 30-10-1932. The members of the firm constituted by this deed were Mulla Fida Ali Sultan Ali and his major sons. -
(1.) THE deed is as follows :- (1) That the partnership shall commence from Kartik Sudhi one, 1988 Sambat. (2) That the working partners shall have no interest in and right and title to the assets, the rolling stock, the goods, the capital of the shop run under the name and style of Mulla Fida Ali Sultan Ali. (3) That the financing partners shall be sole and exclusive owner of all the assets, goods, capital and running stock of the aforesaid shop. (4) That the working partners shall be entitled merely to the share of the profit specified herein below. (5) That the financing partner shall get 7 as in a rupee by way of his share from the profits of the year after deducting the necessary business expenses. He shall be responsible for losses and damages to the extent of 7 as in the rupee. (6) That the working partners shall each get 3 as in the rupee by way of their share from the profit of the business after deducting the necessary business expenses. Each of them shall be held responsible to the extent of 3 as in the rupee for the losses or damages that may accrue after the commencement of this partnership. (7) That the working partners shall each deposit with the financing partner Rs. 2,500 by way of security for any losses incurred in the business or any damage caused by them or any of them. (8) That the financial year of the partnership shall commence from Kartik Sudhi one of Sammat year to the Aso Wadi Amawas. (9) That the account of the partnership business and the profits or losses therein shall be settled at the end of the financial year. (10) That the working partners shall be fully responsible for the efficient and the proper working of the partnership business. (11) That the working partners shall maintain complete and regular accounts of the partnership business. That the financing partners shall be fully entitled to inspect the accounts at any business time he likes. (12) That the working partners shall have no power of attorney to contract any loan or to incur any debt or on behalf of partnership business and in the name of the firm and the shop of Mulla Fida Ali Sultan Ali. (13) That the working partners shall not lend or advance any goods of the shop or sell any articles on credit without the express consent of the financing partner. (14) That subject to the restrictions stated in clauses 12 and 13 hereunto before, the working partners shall have all powers proper and necessary for the efficient management and the working of the partnership business. (15) That no business other than done at present shall be started or done by the working partners without the written consent of the financing partner. (16) That the working partners shall under no circumstances draw on their own account any sum in any month exceeding Rs. 100. (17) That the financing partner shall have the power of terminating the partnership of all or any of the working partners after giving one full months notice to the partner concerned. (18) That the working partners or any of them shall be at liberty to retire from the partnership after giving one full months notice on that behalf to the financing partner. (19) That the working partners or any one of them while retiring or being removed from partnership shall explain and render all accounts in their charge to the financing partner to his full and entire satisfaction. (20) That the financing partner shall in case of misdemeanor or misconduct or gross negligence of the working partners or any of them shall have the power of removing them forthwith from the partnership. THE Income-tax Officer refused the application. A similar application had been made towards the end of 1932 and rejected by an order dated 5-1-1933. A second application had been made in 1934 and rejected early in that year. THE reasons why the application was rejected on 5-1-1933 were that clauses 2, 3, 4, 12, 13 and 16 of the deed appeared to the Income-tax Officer to indicate that the deed was a camouflage devised with a view to evade the proper rate of taxation by transferring the so called firm to the status of a registered firm. As regards clause 7, the Income-tax Officer had ascertained by inquiry that Rs. 2,500 had been borrowed from Seth Najat Ali of Khandwa at 9 per cent. per annum and he appears to have considered that this sum would not be advanced to these ones without security unless there were an assurance that the father would pay the money. THE order was mainly based on suspicion aroused by the terms of the deed. In 1933-34 registration was refused because it was admitted that no additional evidence could be produced by the applicant for registration. In 1934-35 a third application was as mentioned above refused and the order of refusal is set out below :- THE assessee has again put in an application for registration of the alleged firm of Fida Ali Sultanali. It was held in 1932-33 case that no firm has in fact come into being and that the business and property belong individually to Mulla Fida Ali Sultanali. It was further held that the partnership deed dated 25-7-1932 was in effect bogus and did not bring into being a genuine partnership. This finding was confirmed in appeal and revision in that year. Similarly registration was refused in 1933-34 case also and the appeal against the refusal was rejected. "This year again the assessee has put in an application for registration on the basis of the same deed, viz., deed of 25-7-1932. It is admitted there is no additional evidence to be produced besides that produced in 1932-33 case. I must therefore hold that no firm has in fact come into being and that Mulla Fida Ali Sultanali in the sole proprietor of all business and property. A passing reference is made by Ibrahimkhan in his statement to a fresh deed of partnership not yet executed in which the alleged partners have been given some additional powers of selling on credit up to a certain limit. As the deed is not before me and is not yet executed I refrain from commenting about it. But the intention of Mulla Fida Ali to keep the sole proprietorship to himself is apparent. In this connection the application dated 12-5-1934 and the power of attorney filed in 1934-35 can go to show that Fida Ali is the owner. As there is no additional evidence and as the matter was already decided, I refuse registration and hold that no firm exists at all and that it is only a firm which is entitled to registration." An appeal was made and the Assistant commissioner of Income tax came to the following conclusion :- "From a perusal of the terms of the partnership deed and as also from the facts found by the Income tax Officer it is perfectly clear that this partnership does not fulfil the requirements of Secs. 5 and 6 of the Partnership Act. THE following question has been referred to this court arising out of the proceedings :- "Whether in the circumstances of this case there was evidence before the Income tax Officer to hold that no genuine firm had come into existence within the meaning of Sec. 26-A of the Act." It is argued by the learned Advocate for the assessee that the terms of the deed clearly constitute a partnership. It is also pointed out that the motive with which a partnership may be formed is immaterial, reliance being placed on Ayrshire Pullman Motor Services & David M. Ritchie v. commissioners of Inland Revenue. We fully agree with both these contentions and consider that if the deed were real, there would be no question that it would bring into existence a firm. We find ourselves unable to accede to the arguments advanced on behalf of the Commissioner of Income Tax that any or all of the clauses in the deed are inconsistent with the formation of a partnership. This however is not the question. THE material point is whether there was evidence before the Income tax Officer on which he was entitled to decide that the deed was a sham and was not intended to be acted on. It has been very clearly pointed in Bisseshwarlal Brijlal, In re, that the Income Tax Officer is not bound to accept such a document at its face value and Cam require the applicant to adduce evidence from which he may satisfy himself of the bona fides of the applicant. "A deed is not a magical talisman." THE case of Sookinaboi Salebhoy v. THE Commissioner of Income Tax, Bombay, relied on by the learned Counsel for the Commissioner of Income Tax is distinguishable from the present case because the terms of the deed were such in themselves as to show that thy could not constitute a partnership. THE case reported in Abowath Bros. v. THE Commissioner of Income Tax, Burma, is also distinguishable from the present case on the ground that the facts on which the deed of partnership was held to be unreal were extremely strong. THE case however is a good authority for the proposition that the Income tax Officer Can as stated in the Calcutta case enquire into the question of fact whether the partnership is real or is a sham. And indeed in the Scottish case relied on by the assessee, it is said, "THE agreement could not have stood for a minute if it had been possible to say of it on the facts that it was either a fraud or a mere simulative arrangement." It is argued before us by the learned Advocate for the assessee that the partnership deed creates a presumption which must be rebutted by evidence which would convince a court of justice. We do not however consider that that is the proper way in which to view the matter or that it is our function to weigh the evidence in front of the Income tax Officer with a view to deciding as in a court of appeal whether such presumption was in fact rebutted. We take the view that the Income tax Officer was entitled to satisfy himself whether the deed was real or was a sham before deciding to register the firm. THEre was the following evidence before the Income tax Officer in September 1934. (1) THE fact that the accounts as is admitted before us showed distribution of profits according to the terms of the deed. (2) THE fact that there were 2 previous decisions adverse to the applicant. (3) THE fact that the applicant had no further evidence to adduce. (4) THE fact that since the formation of the alleged firm it had not been thought necessary to change the powers of attorney given by the father at a time when he was admittedly sole owner of the business. In our judgment failure to adduce more evidence, failure of the members of the firm to expose themselves to cross examination, failure to adduce the evidence of Najatali who could clearly state whether any agreement with the father collateral to the contract of loan with the sons did or did not exist, entitled the Income tax officer to draw, if he chose, an adverse inference. Again the matter of the powers of attorney might have admitted of any explanation had the firm members given evidence. It may be that the Income Tax Officer placed more weight on this matter than we should, but that was a matter for him. In the circumstances we are unable to say that there was no evidence before the Income tax Officer on which he could hold that the deed was a sham and we therefore answer the reference in the affirmative and allow costs of Rs. 100 to the Commissioner of Income tax to be paid by Mulla Fida Ali Sultanali. Reference answered in the affirmative.;
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