High Court Of Delhi
Kalu Ram & Co. (HUF) vs. CIT
Sections 4, 185
Asst. year 1972-73
Arijit Pasayat, C.J. & D.K. Jain, J.
IT Ref. Nos. 112 & 113 of 1980
21st December, 2000
Counsel Appeared
R.P. Bansal & Ms. Bharati Pawar, for the Applicant : R.C. Pandey, Ajay Jha, & Ms. Prem Lata Bansal, for the Respondent
JUDGMENT
D.K. JAIN, J. :
On being moved by the assessee under s. 256(1) of the IT Act, 1961 (‘the Act’), the Tribunal, Delhi Bench A, has referred the following questions for opinion of this Court :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the order of the ITO refusing to grant registration to the firm of Kalu Ram & Co. ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the income arising from contract was rightly assessed in the hands of the HUF of Kalu Ram & Co.?”
2. The two references, pertaining to the asst. yr. 1972-73, arise out of two appeals files by Kalu Ram & Co. (firm) (‘the firm’) and Kalu Ram & Co. (HUF) (‘the firm’) and Kalu Ram & Co. (HUF) (‘the HUF’). The previous year relevant to the said assessment year ended on 31st March, 1972, in both the cases. The business was originally carried on by the HUF. There were three members in the HUF, namely, Bal Kishan (Karta), his brother Bharat Singh and their mother Smt. Kishan Pyari. The income from the business was assessed in the hands of the HUF up to the asst. yr. 1971-72. On 22nd March 1972, a deed of partnership was drawn up constituting the firm, consisting of all the above three persons as its partners. In the said deed, Bal Kishan was described as party to the first part, Bharat Singh as party to the second part and Smt. Kishan Pyari as party to the third part. The preamble to the deed read as under : “Whereas the party hereto of the first part took the works of contract, namely (i) supply of 18,000 cu.m. of 11/2″ gauge stone ballast (3.8 cm) and 1500 cu.m. of 1″ gauge stone ballast (2.5 cm) duly stacked and loaded into rail borne trucks at Tughlakabad (Zone No. 1) approx. contractor value Rs. 4,74,405 only and (ii) supply of 18000 cu.m. of 11/2″ gauge stone ballast (3.8 cm) and 1500 cum of 1” gauge stone ballast (2.5 cm) duly stacked and loaded into rail borne trucks at Tughlakabad (Zone No. 3) approximate contractor value of Rs. 4,86,300 only. And whereas party hereto the first part took the aforesaid works of contract in his name in his capacity as a Karta of the HUF, known as Kalu Ram & Co., and started carrying on the same with the funds of the said HUF. And whereas the party hereto of the first part has been carrying on the said business. And whereas on 1s of April, 1971, the party hereto of the first part agreed to take the parties hereto of the second and third parts as partners and continued to carry on the said business with them subject to certain terms and conditions which will regular their rights, relations and mutual obligations.”
The profit-sharing ration of the above three persons in the said partnership deed was shown as under : Clause 6 of the deed stipulated that the capital required by the partnership shall be provided by the parties hereto as and when required and in such provisions as may be actually agreed upon from time to time. As a matter of fact, the entire capital of the business, formerly run by the HUF, amounting to Rs. 38,538 became the capital to Bal Kishan. A deposit of Rs. 2,000 in the books of the HUF in the name of Bharat Singh was treated as the capital of Bharat Singh. He made a further deposit of Rs. 4,000 on 2nd March, 1972, but the entire amount of R. 6,000 was withdrawn by him on 26th March, 1972, i.e., before the end of the relevant previous year. Smt. Kishan Pyari did not contribute any capital. On the contrary, her account showed that she had withdrawn Rs. 3,000 on 1st April,1971 and another sum of Rs. 10,000 on 9th Feb., 1972. Thus, she had a debit balance in her account.
The first submitted an application in Form No. 11 for grant of registration under s. 184 of the Act on 25th March, 1972, along with a certified copy of the said partnership deed dt. 22nd March, 1972. The ITO was of the view that the firm was not genuine and the entire income of the business was required to be assessed in the hands of the HUF as it was the real owner of the business. He was of the view that the Karta of the HUF was not competent to enter into partnership with other members of the family to carry on the joint family business and that any such agreement was void ab inito. On fact the ITO found that the alleged firm had not opened any new bank account, it had been carrying on business on the old bank account standing in the name of HUF, no separate books of account had been maintained for the business of the firm; even the refund of security deposit with the railways with respect to the contract undertaken by the HUF for the previous two assessment years had been deposited in the books of the firm. Observing that once a business had been assessed to tax as belonging to HUF, it would continue to be assessed as such until it was shown that a partition had taken place with reference to that business and an order to that effect had been with reference to that business and an order to that effect had been recorded by the ITO under s. 171(3) of the Act, the ITO came to the conclusion that no genuine firm had come into existence. He, accordingly, refused to allow the benefit of registration to the firm. Since the return had been filed in the status of a firm, the ITO made a protective assessment on it in the status of an unregistered firm and made a separate assessment on the HUF including therein the income declared by the firm.
Both the HUF and the firm took the matter in appeals to the AAC. The AAC found that all the formalities necessary for seeking registration had been complied with by the firm. He observed that the ITO had expressed no doubt about the genuineness of the firm on merits. Finding that the said persons had been assessed separately with reference to the share income derived by them from the firm, he held that the firm was entitled to the status of a registered firm.
7. Being aggrieved by the order of the AAC, the revenue took the matter in further appeals to the Tribunal. Dealing with the first question as to whether Karta of the HUF could validly enter into partnership with other members of the family, the Tribunal held that in the light of the principle of law laid down by the Supreme Court in the case of Firm Bhagat Ram Mohanlal vs. CEPT (1956) 29 ITR 521 (SC), the ITO had taken the correct view of law that Bal Kishan could not enter into partnership with Bharat Singh and Smt. Kishan Pyari with reference to the property belonging to the HUF and, therefore, the alleged partnership was clearly illegal and invalid and could not be allowed the benefit of registration. Regarding the genuineness of the firm, the Tribunal recorded the following findings : “Although, our above finding is sufficient to dispose of the present appeal, but in deference to the parties, we may given our finding on the other issues also. We do not agree with the observations of the AAC that the ITO had raised no doubt about the genuineness of the firm. The ITO clearly stated in his orders under ss. 143(3) and 185 of the Act that the firm had not opened a new bank account and that had carried on the bank account originally standing in the name of the family and that the receipts from the contract undertaking were all deposited in this bank account. He also observed that no separate books of account for the firm’s business had been maintained and that the refund of the security deposit with respect to the contact undertaken by the family for the previous two assessment years had been deposited in the books of the alleged firm. Similarly, he pointed out that the contract originally taken in the name of the Karta as representing the family had been carried on as the business of the alleged firm. In our opinion, on these facts also, it cannot be said that a genuine firm had come into existence. Smt. Kishan Pyari had been allowed 40 per cent share in the business without contributing any capital as in fact her account showed a debit balance. There is no consideration for allowing her such a heavy share except that the assessees wanted to divert a part of the income to her to save incidence of tax. We cannot persuade ourselves to held that the assessee was a genuine firm only on the ground that all other legal formalities had been duly complied with as they are not conclusive in the matter.”
8. According, the Tribunal set aside the order of the AAC and restored the order of the ITO disallowing registration to the firm. As a consequence, the order of the AAC in the HUF’s appeal quashing the assessment in the hands of the HUF was also reversed.
9. As noticed above, on the motion of the assessee, the aforenoted questions have been referred for our opinion.
10. We have heard Mr. R.P. Bansal, the learned senior counsel for the assessee and Mr. R.C. Pandey for the Revenue.
11. It is submitted by the learned senior counsel for the assessee that there was no disability for the Karta of the HUF to enter into partnership with other members of the family or even with a stranger. It is also asserted that the ITO had not brought any material on record to hold that the firm was not genuine. Merely because the firm had used the bank account of the HUF, it did not mean that a genuine firm had not come into existence. The learned counsel for the Revenue, on the other hand, contended that the view taken in this behalf by the Tribunal was correct.
12. The special provisions applicable to firms, as they existed prior to 1st April, 1993, i.e., up to the asst. yr. 1992-93, are contained in Para B of Chapter XVI of the Act. The procedure for grant of registration to firm is contained in ss. 184 and 185 of the Act. In order to obtain registration for the purposes of the Act an application is to be filed on behalf of the firm if the partnership is evidenced by an instrument and that instrument specifies the individuals shares of the partners and the application is to be signed by all the partners, (not being minors personally). On receipt of such application, the AO is obliged to enquire into the genuineness of the firm and its constitution as specified in the instrument of the partnership. If, on such enquiry, he is satisfied that there is in existence a genuine firm with the constitution so specified, he is obliged o pass an order in writing under s. 185 of the Act registering the firm. If, however, he is not satisfied, he has to pass an order in writing refusing registration to the firm. In other words, in order in writing refusing registration to the firm. In other words, in order to obtain registration of a firm it is not only mandatory for he assessee to file an application and declaration on behalf of and signed by all the partners along with an instrument of partnership specifying the individual shares of the partners but it is equally obligatory for the AO to enquiry into the genuineness of the firm. Whether a firm is genuine or not is a pure question of fact. It is for the Assessing Officer in the firm is genuine or not is a pure question of fact. It is for the AO in the first instance and the Tribunal, as a final fact-finding authority, to reach a final finding on this question—Ratanchand Darbarilal vs. CIT (1985) 155 ITR 720 (SC).
In the instant case, although the partnership was evidenced by an instrument of so-called partnership specifying the individual shares of the three partners, the truth of actual partnership coming into existence was seriously disputed by the AO. As noted above, the Tribunal, while nothing the factual aspects highlighted by the ITO, viz., non-maintenance of any independent bank account by the firm; the nature and the extent of capital contribution by the parties, etc. has recorded a categorical finding that no genuine firm had come into existence. The Tribunal had observed that Smt. Kishan Pyari had been allotted 40 per cent share in the business without contributing any capital and there was no consideration for allowing her such a heavy share except that the firm wanted to divert a part of its income to her to save incidence of tax. In our view, these are pure findings of fact recorded by the Tribunal, which, as is evident from the format of the questions referred, have not been challenged by the assessee by raising a specific question in that behalf. Since the question referred speak of “on the facts and in the circumstances of the case”, this Court, in the exercise of advisory jurisdiction under s. 256, cannot go behind or question the statement of facts drawn by the Tribunal—Karnani Properties Ltd. vs. CIT (1971) 82 ITR 547 (SC). The aforenoted findings of fact arrived at by the Tribunal are binding on both the parties and the question referred has to be answered on the facts so found by the Tribunal. In the light of the facts found by the Tribunal, the irresistible, conclusion is that since no genuine firm had come into existence, registration to the firm for the purposes of the Act was rightly declined by the ITO.
In view of our conclusion on the question of genuineness of the firm, we feel that it is not necessary to go deeper into the other issue raised by the ITO, namely, whether Bal Kishan, as Karta of the HUF, was competent to enter into partnership with other members of the firm to carry on the same joint family business as a firm constituted of all the members of the HUF. Nevertheless, there is substance in the stand of the revenue to the extent that in the present case for converting the HUF business into a partnership there had to be a division between the coparceners qua the joint family business, although it was not necessary to disrupt the HUF as a whole. It is true that the Hindu law or the Act does not impose any disability upon the members of an HUF in the matter of entering into a contract inter se, as is pleaded by the learned counsel for the assessee. They can enter into a valid partnership, provided they put into the partnership by way of their capital their separate property or the property which they might have obtained as a result of a partition, complete or partial, of the joint property. That was the view taken by the Privy Council in Lachhman Das vs. CIT (1948) 16 ITR 35, wherein it was held that the Karta of a joint family could enter into partnership with an individual member of the coparcenery qua his separate property. This view was approved by the apex Court in Firm Bhagat Ram Mohanlal’s case (supra) and in other cases. But it is well- settled that before entering into such partnership, the prerequisite is the partition of that joint family asset, which is sought to be introduced as capital of the partnership so that it acquires the character of a separate property. Admittedly, in the present case, there was no such partition. As noticed above, the entire capital of the business of HUF was treated as the capital of Bal Kishan and none of the other partners contributed any capital in the firm.
The capital asset invested in the business of the firm was joint family property and was no partitioned. In the circumstances, we feel that the business of Government contract awarded to the HUF continued to be the business of the HUF and it did not transform itself into a partnership business of the firm. We are in agreement with the Tribunal that no partnership came into existence in law.
In the light of our answer to the first question, the necessary corollary is that the view of the Tribunal to the effect that the income arising from the contract was to be assessed in the hands of the HUF is also correct.
For the foregoing reasons, our answer to both the questions referred to us is in the affirmative, i.e., in favour of the revenue and against the assessee. There will, however, be no order as to costs.
[Citation : 254 ITR 307]