- (1.) HEARD learned counsel for the applicant and respondent on the application under Section 5 of the Limitation Act.
(2.) WE condone the delay in filing the reference application under Section 256(2) of the Income-tax Act, 1961, and it be posted for hearing. The present application under Section 256(2) of the Income-tax Act, 1961, as made by the Commissioner of Income-tax, Jodhpur, is on the limited question as to "whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was legally justified in holding that the firm was a genuine one and in granting registration under Section 185 to the assessee-firm" ? The assessee-firm contended that it came into existence with effect from April 1, 1986, under a partnership deed dated December 21, 1987, and it was comprised of six partners. The accounting period relevant to the assessment year 1988-89 ended on March 31, 1988. On March 2, 1988, the assessee-firm applied in Form No. 11 for the registration of the firm under Section 185 of the Income-tax Act for the assessment year 1988-89. The application was duly supported by the original partnership deed. However, the Income-tax Officer examined two of the partners, but the lady partners, who were three in number could not be produced before the Assessing Officer, since they were residing at Delhi. The Assessing Officer held that it was not a genuine firm and in recording such a finding, he was impressed by the fact that the bank account stood in the name of one of the partners, namely, Shri S.M. Bhatia, who received payments from one of the parties doing business with the firm and held further that two other supporting partners seemed to be benamidars of Shri S.M. Bhatia, in whose name the bank accounts stood. The Assessing Officer also refused registration to the assessee-firm under Section 185. The learned Commissioner of Income-tax (Appeals) confirmed this finding holding, inter alia, that the partnership was not really existing, but it was a make-belive device to give a cover to the business activities of one Shri S.M. Bhatia, who was the only person involved in the business. The assessee thereafter went up in appeal before the Income-tax Appellate Tribunal and the Tribunal by its order dated April 30, 1993, came to a finding that the assessee-firm was entitled to a grant of registration and further held in favour of the existence of the partnership firm overruling the findings as arrived at by the Assessing Officer as also the appellate authority. Mr. D.S. Shishodia and Mr. Sandeep Bhandawat, advocates, who appeared for the Commissioner of Income-tax, Jodhpur, cited before us various rulings in support of the contention that in appropriate cases the income-tax authorities could show a refusal of registration of the partnership firm and disbelieve in the existence of the firm itself.
(3.) IN Brijlal Madanlal v. CIT [1980] 121 ITR 364 (Bom), it was held that the essentials for the registration of a firm are : (1) whether on behalf of the firm an application should be made to the INcome-tax Officer by such person and at such times and containing such particulars and being in such form and verified in such manner as are prescribed by the rules ; (2) The firm should be constituted under an instrument of partnership; (3) The instrument must specify the individual shares of the partners ; and (4) The partnership must be valid and genuine and must exist in terms specified in the instrument. When an application for registration of a firm is made to the INcome-tax Officer, it is open to the INcome-tax Officer to verify whether the partnership is really a genuine partnership or whether the partnership is a sham one. Merely because the names of certain partners are specified in the deed of partnership and their shares are also specified, the partnership does not automatically become a genuine partnership and the INcome-tax Officer is entitled to examine whether each of the partners mentioned in the deed of partnership is a real partner and whether the shares specified are real and whether the profits which are sought to be distributed under the deed will truly be the profits of the individuals who have been shown as partners. If the INcome-tax Officer finds that there is no genuineness in respect of any one of these, it is open to the INcome-tax Officer to reject the application for registration on the ground that no genuine partnership has been brought into existence by the partnership document. In the facts and circumstances of the case, however, it was held by the Bombay High Court that the conclusion of the income-tax authorities and the Tribunal was correct and the claim to registration of the firm stood rightly refused by the Department. The Calcutta High Court in CIT v. Lalit Trading Corporation [1980] 125 ITR 586, also reiterated the principle that it was a well settled proposition that in granting registration the Income-tax Officer has to find out whether there was a genuine partnership firm evidenced by a partnership deed. The fact that there is an order of assessment in respect of the firm does not preclude the examination of the question whether the firm was genuine or not. The cumulative effect of the facts in the case was that there was no evidence at all of any overt act by any of the partners doing anything regarding the management or the carrying on of the business except signing some letters and cheques and these were indicative of the fact that there was in fact no genuine firm and the firm was not entitled to registration. The fact that there was an order of assessment in respect of the firm did not preclude the examination of the question whether the firm was genuine or not in the proceedings for the registration of the firm. ;