ISHWARLAL Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE two questions, namely:

(2.) THE assessment years under reference are from 1966 67 to 1969 70. The assessee, M/s Ishwarlal & Brothers, is a registered partnership firm carrying on business of manufacture and sale of real and imitation Jari Kasab. Its partners are four brothers, namely, Jamnadas Moolchanddas, Nagindas Mulchanddas, Jaikishandas Moolchanddas and Bhagwandas Moolchanddas. Each partner has 25 per cent share in the profits and losses of the partnership firm. The assessee firm had a branch at Bangalore till 23rd October, 1957 (end of Samvat Year 2013). It is the case of the assessee that it wound up its business so far as the Bangalore branch was concerned w.e.f. 23rd October, 1957, and thereafter an independent firm styled as Ishwarlal & Company came into existence w.e.f. 24th October, 1957. This independent firm consisted of two major sons of Nagindas, namely, Ramanlal and Ratilal, each of whom had 27 1/2 per cent share in the profits and losses of the partnership. Three minors, namely, Narendra Jamnadas, Arvind Bhagwandas and Ishwarlal Kishandas were admitted to the benefits of the partnership and each was given a share of 15 per cent in the profits of the partnership. It thus appears that in the new and independent firm, which is stated to have taken over its business in Bangalore w.e.f. 24th October, 1957, two sons of Nagindas, who were majors at the date of the creation, of the new partnership, and one minor son of each of the remaining three partners of the Surat, firm, namely, jamnadas, Bhagwandas and Jaikishandas, were admitted to the benefits of the new partnership. In other words, according to the Revenue, all the four partners of the firm having its head office at Surat have an interest through their respective sons in the newly created partnership which is said to be carrying on business in Bangalore w.e.f. 24th October, 1957. For the sake of convenience we will refer to this newly created firm as the "Bangalore firm" and the old firm having its head office at Surat as the "Surat firm".

(3.) THE appeals were, therefore, dismissed. The Bangalore firm, therefore, sought a reference under s. 66(1) of the Indian IT Act, 1922. The question which the High Court of Mysore at Bangalore was required to consider was: "Whether there was evidence on which it was open to the income tax authority to come to a decision that the firm of Ishwarlal & Co., as constituted under the partnership deed dt. 24 10 57, did not exist ?" At the hearing of the said reference the learned counsel for the Revenue conceded that the finding recorded by the Tribunal that the old branch of the Surat firm was being continued in the guise of an independent firm was not based on any evidence and the same is to be ignored. The High Court found that the finding of the Tribunal that the old branch of the Surat firm was being continued in the guise of a new firm is inconsistent with the action of the ITO who assessed the assessee in the status of an unregistered firm apportioning the tax amongst the several partners of the Bangalore firm in the manner provided under the deed of partnership. Their Lordships observed that if the assessee were in fact a branch of the Surat firm, the income of the assessee should have been treated as income of the Surat firm and assessed accordingly. There was no finding by the Tribunal that the partners of the Bangalore firm were benamidars of the partners of the Surat firm. Taking the view that the ultimate finding recorded by the Tribunal regarding the genuineness and existence of the Bangalore firm was influenced by the finding that the old branch of the Surat firm was carrying on business in the guise of a new and independent firm vitiated the conclusion reached by the Tribunal, without answering the question, the High Court sent back the matter to the Tribunal for a fresh hearing of the appeals after giving a fresh opportunity to the parties to be heard in the light of the observations made by the High Court for a finding on the question of genuineness and existence of the Bangalore firm. It appears that in the meantime the ITO, Surat, relying on the decision of the Madras Tribunal, unaware of the judgment delivered by the High Court, proceeded to tax the Surat firm on the basis that the income of the Bangalore firm was liable to be clubbed with the income of the Surat firm. This order was passed on 29th March, 1971. He also made certain consequential orders. The Surat firm feeling aggrieved 73 by the view taken by the ITO, Surat, carried the matter in appeal to the AAC, who reversed the decision of the ITO in this behalf. The Revenue, therefore, carried the matter in appeal to the Tribunal, Ahmedabad Bench (hereinafter called the "Tribunal at Ahmedabad"). In the meantime, on the basis of the remand order made by the High Court of Mysore at Bangalore, the Tribunal, Bangalore Bench (hereafter called the "Tribunal at Bangalore"), came to the conclusion that the Bangalore firm was not a genuine firm and did not exist as evidenced by the partnership deed dated 24th October, 1957. The reasons which prevailed with the Bangalore Bench have been reproduced in extenso in para. 14 of the Tribunal's order. Those reasons show the foundation laid by the Revenue before the Tribunal, Bangalore Bench, in support of its contention that the Bangalore firm was not a genuine firm and did not really exist was accepted. It transpires from the reasons which have been set out in the Tribunal's order that Ramanlal Nagindas when asked had stated that he was unaware of the extent of his share in the partnership because his uncle, Jamnadas, was carrying on the business at Bangalore. This statement which is found in the extracted portion from the judgment of the Tribunal at Bangalore shows that it was Ramanlal Nagindas, the partner of the Bangalore firm, who had appeared before the taxation authorities and had stated that Jamnadas was managing the affairs of the business carried on by the Bangalore firm. Having regard to the various circumstances placed on record which have been dealt with in the extracted portion from the order of the Tribunal at Bangalore, it was held that the Bangalore firm was not genuine and had no existence whatsoever. The Tribunal at Ahmedabad relying on the facts which were laid in the proceedings concerning the Bangalore firm reproduced in their order, ultimately came to the conclusion that the income earned by the Bangalore firm which was held to be non est must be assessed and taxed as the income of the Surat firm because the status quo ante must be taken to be established as a mere corollary to the finding that the Bangalore firm was not a genuine firm and did not have any existence. The Tribunal, therefore, concluded that the decision of the ITO to include the income of the Bangalore firm as income in the hands of the Surat firm was correct. The Tribunal, therefore, allowed the appeal reversing the decision of the AAC. On the restoration of the order of the ITO, the assessee (Surat firm) felt aggrieved and sought a reference under Sub S. (2) of S. 256 of the IT Act, 1961.