MANILAL JAMNADAS SEEDS Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS reference relates to registration of a firm under the Indian IT Act, 1922. The assessment years under consideration are 1959 60, 1960 61 and 1961 62. By a deed of partnership dated November 11, 1950, a partnership firm was constituted to carry on business in the name of M/s Champaklal Jamnadas & Co. It consisted of four partners, namely, (1) Manilal Jamnadas, (2) Keshavlal Ravchand, (3) Champaklal Jamnadas & (4) Dharamshi Maneckchand. The profits of the business were to be shared in the manner indicated with a particular percentage of profits earned by way of brokerage and a different percentage of profits earned in speculation business. Out of these four partners Manilal & Champaklal are brothers. The partnership firm was to carry on business of speculation and brokerage. This firm continued to carry on business till the end of Samvat year 2013, i.e., October 23, 1957, being the accounting year relevant to the asst. yr. 1958 59. As from the beginning of Samvat year 2014, i.e., October 24, 1957, the firm was reconstituted. Champaklal Jamnadas & Dharamshi Manekchand retired from the firm and Ashokkumar Champaklal, the son of erstwhile partner, Champaklal Jamnadas, was brought in as a new partner. This change was effected by a deed of partnership dated January 8, 1958, and the deed was to be operative w.e.f. October 24, 1957. Under this deed the three partners, Manilal Jamnadas, Keshavlal Ravchand & Ashokkumar Champaklal, were to have share in the profits of the brokerage business and speculation business as indicated therein. The reconstituted firm also changed the firm name to M/s Manilal Jamnadas (Seeds). It was stated in the partnership deed of the reconstituted firm that this firm "shall succeed to the assets and liabilities of the said concern of M/s Champaklal Jamnadas & Co." Champaklal Jamnadas could not continue as a partner as he had become a member of the stock exchange, because as per the rules and regulations of the stock exchange, a member thereof was not permitted to be a member of a firm in which he would have dealings as a broker.

(2.) IN due course the reconstituted firm applied for registration under S. 26A of the Indian IT Act, 1922, for the asst. year 1959 60 and it similarly made applications for renewal of registration for the next two years 1960 61 and 1961 62. The ITO refused to register the firm holding that the firm had sought registration on the strength of a deed of partnership which was not genuine. He found on examination of the books of account vis a vis the partners that Ashokkumar was not a real partner but was an ostensible partner and the real owner of his share was his father, Champaklal. For coming to this conclusion he gave three reasons : (1) The bank account opened with the Bank of Baroda by the firm showed Champaklal Jamnadas as a partner of the firm. Thus, although ostensibly his son, Ashokkumar Champaklal, was a partner, the real partner was Champaklal Jamnadas. (2) Although under the terms of the partnership deed there was a stipulation for payment of interest to the partners, no such interest had been paid to the partners, and (3) Although under the terms of the partnership deed there was no stipulation to pay any salary to any of the partners, Keshavlal Ravchand had, in fact, been paid salary for these years. The appeals preferred by the assessee firm were disposed of by the AAC by a common order. He took the view that the last two objections above referred to by the ITO had either no basis or had no merit such as to affect the genuineness of the firm. So far as the first objection was concerned, the AAC pointed out that on enquiry it appeared that the facts stated by the ITO were not correct. In the earlier partnership, Manilal Jamnadas & Champaklal Jamnadas were carrying on business in the name of Champaklal Jamnadas & Co., in partnership with two outsiders. Subsequently, Champaklal Jamnadas became a member of the stock exchange and under the rules of the stock exchange he was debarred from becoming a partner in any firm. Accordingly, he retired from the partnership. A new partnership was constituted between Manilal Jamnadas, Keshavlal Ravchand & Ashokkumar Champaklal, the third being the son of Champaklal. The earlier partnership had enjoyed facilities with the Bank of Baroda which refused to extend the same facilities to the reconstituted partnership unless Champaklal's name was associated. In order to obviate the difficulty the firm decided to open a joint account in the names of Manilal Jamnadas, Champaklal Jamnadas & Keshavlal Ravchand and not a partnership account in terms of which Champaklal's name was associated in the bank account with the Bank of Baroda Ltd. He, accordingly, took the view that the firm as constituted by the partnership deed dated January 8, 1958, was a genuine partnership and was entitled to registration for the asst. year 1959 60 and renewal of registration for the subsequent two years. On an appeal by the ITO the Tribunal set aside the order passed by the AAC for all these years. So far as the last two reasons assigned by the ITO for refusing registration were concerned, the Tribunal agreed with the finding of the AAC that the said reasons were either not valid or misconceived. So far as the first reason given by the ITO was concerned, the Tribunal took a view different from the one that was taken by the AAC. The Tribunal in its order pointed out that there was no evidence to support the explanation given by the firm for including the name of Champaklal Jamnadas in the bank account opened with the Bank of Baroda ; that under cl. 8 of the partnership deed the banking account of the reconstituted firm ought to have been opened in the name of the firm, namely, M/s Manilal Jamnadas (Seeds). However, the banking account was not opened in such a name but was opened in the personal names of three individuals, namely, Manilal, Champaklal & Keshavlal. The Tribunal also pointed out that in the form for opening account "business or profession" of the account holders was shown as cotton, bullion and seeds brokers. In fact, no such business was carried on by the three persons including Champaklal Jamnadas. Under the deed of partnership of the reconstituted firm the business of the firm was to be that of brokerage, tarvani and as merchants in forward business in gold, silver, arenda, oil seeds, cotton and shares and in any other commodity as may be agreed to by the partners. The Tribunal in view of these facts presumably took the view that the bank account was opened by the firm itself and not by the individuals. The Tribunal applied its mind to the question, "if Champaklal Jamnadas was not a partner of the firm why should he have been allowed to operate on the account ?" The Tribunal noted the fact that in fact the other two partners had operated the account and Champaklal had not done so, but pointed out that there was clear authority for Champaklal Jamnadas to operate on that account. If regard be had to the stipulations provided in the bank account opening form, then it was clear that not only Champaklal took the risk in respect of the bank account but the other partners also took the risk in respect of Champaklal inasmuch as he had full authority to draw upon the banking account. On these facts, the Tribunal found :

(3.) MR . Dastur, on behalf of the assessee firm, contended that the Tribunal was not justified in holding on the material on record that the reconstituted firm evidenced by the partnership deed dated January 8, 1958, was not a genuine firm. He submitted that the Tribunal was not justified in holding that Ashokkumar was a benamidar of his father, Champaklal. He submitted that the burden to show that Ashokkumar is a benamidar or nominee of his father is entirely on the Revenue and that such burden has not been discharged by the Revenue. He pointed out that the particulars given in the form for opening the bank account do not show that Champaklal was a partner ; that the contention of the assessee firm that the bank account had to be opened in the names of the three persons because the bank declined to give the facilities unless the name of Champaklal was joined as one of the account holders, was not challenged in the memo of appeal by the ITO before the Tribunal and the Tribunal was not justified in taking the view that there was no evidence in support of the explanation for opening of the bank account, which was accepted by the AAC. He submitted that a mere look at the particulars given in the bank account opening form will not be sufficient to come to a conclusion whether Ashokkumar is a real partner of his own right or a nominee or a benamidar of his father. Ashokkumar, according to his submission, can only be held to be a benamidar or a nominee of his father if it is shown that the profits of the reconstituted firm coming to the share of Ashokkumar had really gone to Champaklal, his father. Such onus was not discharged by the Revenue and he submitted that there was no warrant for the finding that Ashokkumar was a mere nominee or benamidar of his father. Secondly, he contended that even if Ashokkumar is assumed to be a nominee or a benamidar of his father, that by itself will not justify the taxing authority and the Tribunal in refusing registration of the assessee firm. He submitted that even though Ashokkumar may be a benamidar, the firm is entitled to registration if regard had to the correct position in law. Lastly, he submitted that the question whether Ashokkumar is a nominee or a benamidar should not be decided in this reference, but it should be left open and his second submission ought to be decided on the assumption that Ashokkumar is a nominee or benamidar and on that assumption the question should be considered whether the Tribunal was justified in refusing registration of the reconstituted firm.