Bhatnagar, J. -
(1.)IN compliance with the directions of this court in D.B. Civil Misc. INcome-tax Reference No. 117 of 1972, the INcome-tax Appellate Tribunal, Jaipur Bench (hereinafter to be referred to as " the Tribunal "), filed a statement of the case and referred the following question under Section 256(2) of the I.T. Act, 1961:
"Whether, in the facts and in the circumstances found by the Tribunal there was material to come to the conclusion that the partnership firm constituted by the deed dated July 1, 1959, was not genuine ?"
(2.)THE facts of the case, relevant for answering the question under reference, are as under :
Ramesh Chandra Moondra, in his individual capacity, was running a business known as Subhash Medical Stores, Bhilwara, since November, 1955. He executed a sale deed on July 1, 1959, for a consideration of Rs. 4,500. for the goodwill, in the name of his wife, Smt. Chandra Kanta Moondra, and his brother's wife, Smt. Shanta N. Maheshwari. On the same date the two ladies entered into a partnership by executing a partnership deed and the partnership business came to be known as M/s. Subhash Medical Stores, Bhilwara. THE firm was got registered with the Registrar of Firms and a bank account was also opened in the name of the firm mentioning the two ladies as its partners. "However, the business continued to be carried on by Ramesh Chandra Moondra, as an employee of the registered firm on a remuneration of Rs. 250 p.m. It was he who operated the bank account on behalf of the partners. THE information regarding the individual business converted into partnership firm was sent to the Sales Tax Department also. An application was filed on behalf of the firm under Section 184 of the I.T. Act, 1961 (hereinafter to be referred to as "the Act"), for registration of the firm under s. 185 of the Act. THE prayer was rejected by the ITO on the ground that the two ladies had no knowledge about the business and Ramesh Chandra Moondra was really in control of the business. In the opinion of the Income-tax Officer (for short " the ITO ") the firm in the partnership of the two ladies was not genuine and -was rather a device to evade tax. An appeal against the order of the ITO rejecting the application for registration was filed before the AAC of Income-tax (for short " the AAC ") but with the same result. THE Appellate Tribunal also rejected the appeal filed by M/s. Subhash Medical Stores, Bhilwara, in grievance to the refusal of registration of the firm under the I.T. Act.
The question before the authorities concerned related to the assessment for the years 1961-62 to 1963-64. Three reference applications were, therefore, filed under Section 256(1) of the Act for making reference to the High Court regarding the question as to whether the partnership created by the partnership deed dated July 1, 1959, was genuine or not and whether the income-tax authorities were justified in rejecting the prayer of the partners to register the firm under Section 185 of the Act. The Tribunal was of the opinion that the transaction between Ramesh Chandra Moondra and the alleged partners of the firm, viz., Smt. Chandra Kanta Moondra and Smt. Shanta N. Maheshwari, was a benami transaction and did not involve any liability. The Tribunal considered it to be a pure question of fact which could not be made the subject of reference. For the reasons given in the order, annexure-7, dated January 17, 1972, the Tribunal rejected the reference applications. M/s. Subhash Medical Stores, Bhilwara, then filed an application under Section 256(2) of the Act, in this court with the prayer that the Tribunal be directed to refer the question of law arising in the matter. The Division Bench examined the assessment orders of the ITO and the appellate orders of the AAC and the Tribunal and arrived at a conclusion that a question of law did arise for examination by this court. The Division Bench, therefore, required the Tribunal to state a case bearing on the question and refer it to this court under Section 256(2) of the I.T. Act, 1961. It is in compliance with that direction that the Tribunal has filed a statement of case and referred the question to this court.
There is no dispute on the point that since November, 1955, the business under the name and style of Subhash Medical Stores, Bhilwara, was carried on by Ramesh Chandra Moondra in his individual capacity. It is also-not in dispute that on July 1,1959, a sale deed, annexure-1, was executed by Ramesh Chandra Moondra in favour of his wife, Smt. Chandra Kanta Moondra, and Smt. Shanta N. Maheshwari, who happens to be the wife of Shri Naresh Chandra Moondra, the real brother of Ramesh Chandra Moondra. It was on the same date that the two ladies, viz., Smt. Chandra Kanta Moondra and Smt. Shanta N. Maheshwari, entered into a partnership and executed the partnership deed dated July 1, 1959, annexure-3.
The question emerging in the matter is as to whether the execution of sale deed by Ramesh Chandra Moondra in favour of his wife and sister-in-law for a petty amount of Rs. 4,500 and the creation of the partnership can be said to be genuine or it was a sham transaction to avoid tax liability, in the individual capacity.
Mr. H. M. Parekh, learned counsel for the firm, strenuously contended that the partnership deed speaks of all the necessary ingredients for creating a partnership firm. That it was duly registered under the Partnership Act and, as such, merely on the ground of the ladies having no knowledge of the business and they being closely related to Ramesh Chandra Moondra, there would be no justification to hold that the transaction was not genuine.
(3.)MR. J. P. Joshi, on the other hand, emphasized the fact that Ramesh Chandra -Moondra could not have sold such a nourishing business for a petty amount of Rs. 4,500 and thereafter would have got employed in the same firm for the remuneration of Rs. 250 only. According to MR. Joshi, the very fact of Ramesh Chandra Moondra continuing to control the business and operating the bank account on behalf of the partners indicates that the sale deed was a benami transaction and creation of the partnership a farce.
It has also been stressed by Mr. Joshi that from the statement of the two ladies, it cannot be believed that the source of money they alleged to have invested in the business, really existed.
Cases are not rare in which some near relatives form a partnership for a particular business and one of them holds a domineering position or controls the business while others remain- inactive. What is required for a partnership under Section 4 of the Partnership Act is that the partners have specified shares in the business and all of them or any one of them controls and manages the business. Similarly, there are a number-of cases where the partners possess no knowledge about the business and authorise some other person to act on their behalf. In other words, the employees or the agents look after the business. But, that would not mean that the legal requirement of a partnership are lacking. With regard to the argument that the genuineness of the partnership firm is established by the fact that it has been registered under the Partnership Act, suffice it to say that merely because a firm is registered under the Partnership Act, it is not obligatory upon the income-tax authorities to register it under Section 185 of the Act. The reason is that the income-tax authorities are expected to probe into the matter from the point of view as to whether the partnership is genuine or a mere device to evade tax or to seek some relief in that respect.