Supreme Court of India
S.P. GRAMOPHONE COMPANYversusC.I.T PATIALA
- Citation
- 1986 INSC 9
- Decided
- 29 January 1986
- Disposal
- Dismissed
- Bench
- V D TULZAPURKAR
Holding
Registration under Section 26A was rightly refused because, although the partnership may have been valid in law, the firm was not a genuine partnership and both legal validity and factual genuineness are required for registration.
Summary
The appellant, S.P. Gramophone Co., sought registration of its partnership under Section 26A of the Income Tax Act, 1922 for AY 1961‑62 after a fresh partnership deed added four new partners to the original two, who were disabled. The Income Tax Officer rejected the application, alleging that the new partners were merely benamidars, that the partnership lacked mutual agency, and that no genuine profit distribution was shown. The Tribunal affirmed the rejection, and the High Court, after reframing the issue, held that no genuine partnership existed, though the fact that some partners were benamidars was not a bar to registration. The Supreme Court held that both legal validity and factual genuineness of a firm are required for registration; even if the partnership is valid in law, registration can be refused if the firm is not genuine, pointing to restrictive clauses and the dummy nature of the new partners. Consequently, the Court upheld the refusal of registration and dismissed the appeal.
Issues considered
- Whether the partnership deed created a valid partnership in law under the Partnership Act.
- Whether the firm constituted a genuine partnership for the purpose of registration under Section 26A of the Income Tax Act, 1922.
- Whether the presence of benamidars among the partners bars registration.
- Whether the lack of profit‑distribution entries in the books affects the genuineness of the partnership.
Legislation cited
- Income Tax Act, 1922s. 26A
- Income Tax Act, 1961s. 184, s. 185
- Income Tax Rules, 1922s. Rule 6
- Indian Partnership Act, 1932s. 4
Subjects
partnershipregistrationIncome Tax Actgenuine partnershipbenami partnersmutual agencyprofit distributiontax avoidancepartnership deed
Judgment
164
A
S.P. GRAMOPHONE C<llPANY
v.
C.I.T., PATIALA
JANUARY 29, 1986
B [V.D. TULZAPURKAR AND SA8YASACHI MUKHARJI,.JJ.]
Indian Income Tax Act, 1922 & Income Tax Act, 1961:
Section 26A/Sections 184 & 185 - Firm - Registration of
- Refusal by Tax Authorities - When valid - Instrument of
1
c. partnership - Not militating against firm's validity in law -
But pointer against factual genuineness.
Prior to the Assessment Year 1961-62 the appellant-firm
was a partnership concern consisting of .two partners, each
having 50% share in the profits and losses of the firm and it
was granted registration. Both the partners met with an
D accident on 19.10.1958 in which they suffered serious injuries
and became invalid. On 1.4.1960 a fresh Deed of Partnership
was executed by virtue of which the two original partners
retained 25% share each while the four new incoming partners
were given 12.1/2% share each. Prior to April 1,1960 two of
the new incoming partners were already working as employees in
E the original firm. The fresh Partnership Deed, inter alia,
provided that the partnership was at will determinable by one
month's notice in writing.
For the Assessment Year 1961-62 an application duly
signed by all the partners seeking registration of the firm
under s. 26A of the Income Tax Act 1922 on the strength of the
F fresh Partnership Deed was made on 15th September 1960
annexing therewith the original Partnership Deed. The four new
incoming partners were examined by.the Income Tax Officer and
their statements were recorded, which, the ITO felt, clearly
suggested that they were not real partners but dummies brought
in to avoid the higher tax incidence. After considering the
G Partnership Deed, the statement of the four new incoming
partners and the fact that profits had not been shown to have
been distributed in the books and no entries made in the year
of account, the ITO rejected the application . and refused
registration.
The view taken by the Income Tax Officer was confirmed
R by the Appellate Assistant Commissioner and by the Tribunal.
S.P.GRAMOPHONE CO. v. C.I.T. 165
A
The Tribunal, however, was of the view that four new il)coming
>- partners were benamidars of the two original partners.
On Reference made to the High Court, the High Court felt
that the first question referred· to it did not bring into
focus the real issue and, therefore, recast the same. The High B
Court upholding the refusal of registration held: (1) that no
genuine partnership >had Come into existence and that the
finding of the lower authorities in that behalf was based on
ample material on record; (2) that the assessee is not enti-
~. tled to the registration under s.26A of the Income Tax Act,
_, 1922 read with Rule 6 of the Income Tax Rules, 1922; and (3)
that the mere fact that the four new incoming partners were C
found to be benamidars of the two original partners could not
be a proper ground for refusing registration.
In the appeal to this Court on behalf of the appellant
it was contended: (i) that refusal to grant registration to
the extent that it was based on the ground that no valid
partnership .in law had come. into existence was unsustainable; I)
, (ii) that there was no evidence to justify the finding on the
'"' genuineness of the appellant firm, and (iii) that the High
Court having held that registration could not be refused
merely on the ground that some of the partners were benami-
dars, registration ought to have been granted.
On behalf of the Revenue it was contended: (1) that even E
if a valid partnership in law came into existence by executing
the Deed registration could be refused on the ground that
factually no genuine firm had come into existence; (2) that it
is open to _the High Court to reframe or recast a question
formulated by the Tribunal before answering it so as to bring
out a real issue between the parties; (3) that the High Court F
-- ,, had rightly affirmed the view of the Tribunal that the
"· appellant-firm had not genuinely come into existence; (4) that
though under the 1922 Act no provision similar to the Explana-
tion to Sec.185 of 1961 Act obtained and the fact that some
members were benamidars of others in a firm could be no bar to
the grant of registration, if the taxing authorities were to G
record an adverse finding on the factual genuineness of the
firm registration could be refused; and (5) that so far as the
actual division or distribution of profits, the lower authori-
ties were justified in not relying on loose sheets indicating
the working of the firm and the assessee cannot be allowed to
·-:- fill the lacuna by producing books for the following year. H
Dismissing the Appeal,
166 SUPREME COURT REPORTS [L9B6l 1 s.c.R.
A
HELD: 1. The concept of a firm being valid in law is
distirict from the factual genuineness and for the purpose of
granting registration both aspects are relevant and U1JSt be
present and one without the other will be insufficient.[173 G]
2. Even if a firm brought into existence by executing an
instrument of partnership deed is shown to possess all the
B
legal attributes it would be open to the taxing authority to
refuse registration if it were satisfied that no genuine firm
has been constituted. Moreover, son! of the provisions
c
contained in such instrumnt may not militate against the
firm's validity in law but these can be a pointer against its
factual genuineness. [173 G-H; 174 A] -
•
3. Clause 5 of the Partnership Deed . in the instant
case, vests the control and mansgeD!nt of the partnership
business in the original two partners and denies to the four
new incoming partners any right in the mansgeD!nt of the
affairs or the accounts of the partnership business, may not
D
show lack ,of the eleD!nt of 1111tual agency but 'has a vital
bearing on the factual genuineness of the firm and read along
with Clauses 3,6, 7 and 8 would go to show that the four new
incoming partners were no real partners but were dummies thus
throwing doubt on the genuineness of the firm. Moreover, the
facts that the four new incoming partners were very close
E
relatives of the two original partners and that two of them
were working as employees in the erstwhile firm whose service
as such were continued in the relevant year on existing re1111-
neration with such increD!nts as the two origins! partners may
agree to give cannot be lost sight of. In addition, the state-
ments of the four new incoming partners that were recorded in
F
November 1965 clearly show that they had signed the instrument
mechanically without knowing or reading, much less after ).
understanding the implications thereof. [174 A-D]
4. In the instant case, the profit and loss account
statement prepared on loose sheet did not contain any distri-
G
bution of profits and or allocation thereof to each one of the
new partners. [175 El
5. Production of account books in this Court has
deprived the taxing authorities an opportunity to make their
COllllll!nts thereon. Apart from this aspect the question would be
H
whether even such entries were genuine entries intended to be
acted upon or mere paper entries making a show of allocation
S,P.GRAMOPHONE CO. v. C.l.T. [TULZAPURKAR, J,] 167 A
of the share of profits due to each one of these four new
incoming partners-and this would require further investigation
>- into relevant facts. This aspect throws considerable doubt on
the point whether or not entries were intended to be acted
upon. [175 G--H; 176 B] B
6, In the instant case, there was sufficient material on
record on the basis of which the taxing authorities as well as
the Tribunal could record an adverse finding on the genuine-
ness of the firm against the assessee and registration was
rightly refused. (176 C]
CIVIL APPELLATE JURISD{CTION: Civil Appeal No, 850 of
1974. c
From the Judgment and ·order dated 24.9.1973 of the
Punjab and Haryana High Court in Income Tax Reference No. 21
of 1972.
S.T. Desai, M/s, J.B. Dadachanji, Harish Salve, P.K. Ram
and Mrs. A.K. Verma for the appellant. D
V.s. Desai, Gauri Shankar. and Miss A. Subhashini for
the respondent.
The Judgment of the Court was delivered by
E
TULZAPURKAR, J, This appeal raises the question of
granting registration t.o the appellant-firm (the assessee)
under s, 26-A cif the Income Tax Act, 1922 for the Assessment
Year 1961-62, The taxing authorities, the Tribunal and the
High Court have refused registration sought by the appellant-
firm and hence this appeal. F
Prior to the Assessment Year 1961-62 the appellant-firm
__. was a partnership concern consisting of two partners, Shri Pal
-, Singh and Shri Sadhu Singh, each having 50% share in the
ilroL!,,ts and losses of the firm and it was being granted regis-
trati~t appears that the two partners met with an accident
on 19.10, i·953 in which Shri Pal Singh suffered a serious head G
injury and lost his memory for quite some time while Shri
Sadhu Singh suffered an injury to the spinal cord which
rendered him invalid for quite a long time and the case put
forward was that as the business was on extensiVe scale and
the two partners were physically handicapped (they recovered
during the meantime) they . entered into a fresh Deed of H
Partnership on 1.4.1960 by virtue of which Pal Singh and Sadhu
168 SUPREME COURT REPORTS {19861 1 s.c.R.
A
Singh of the one part and Sarvashri Surjit Singh, Gulzar
Singh, Hari Singh and Harbans Singh of the second part became -f
partners with the following share ratio in the profits and
losses, namely, Pal Singh and Sadhu Singh the original two
partners retained 25% share each while Surjit Singh, Guizar
B Singh, Hari Singh and Harbans Singh were given 12-1/2% share
each. Admittedly two of the new incoming partners, namely
Surjit Singh and Guizar Singh were relate to Pal Singh being
his son and brother respectively who were obviously accommo-
dated within the 50% share originally owned by Shri Pal Singh c""-
while the other two incoming partners Hari Singh and Harbans "1
c Singh were related to Shri Sadhu Singh both being his
brothers who were accommodated within the 50% share originally
owned by Sadhu Singh. Moreover, prior to April 1, 1960 Hari
Singh and Harbans Singh were already working as employees in
the original firm.
At this stage it will be convenient to indicate some of
D
the salient clauses of the Partnership Deed entered into
between the parties on 1.4.1960. Under cl. 1 the partnership
was declared to be one at will determinable by one month's ;J
notice in writing and under cl. 3 the parties of the second
part (i.e. the four new incoming partners) were not required
to contribute any capital but the original two partners were
E
to do so in equal shares. Clause 4 provided that Shri Hari
Singh and Shri Harbans Singh shall continue to draw their
salaries or other remuneration from the firm as was being
drawn by them along with any increment as agreed to by the
parties of the first part (the original two partners) from
time to time. Clause 5 was significant as it provided that the
F
four new incoming partners "shall not interfere in the manage-
ment or the affairs or the ·accounts of the partnership )-
-
business." Under clause 7 it was provided that none of the Y'
four new incoming partners shall sell, mortgage, hypotheeAte,
gift or will away or alienate in any way whatsoever,...'r(1-;' share
to any third person and that in case of need they shall
G
alienate their shares in favour of the parties of the first
part (the two original partners) only and not even to any one
amongst them. It ·was further provided that in case of a
dispute among the partners regarding any of the clauses of the
deed the decision of the partners of the first part (two
original partners) shall be final and conclusive and binding
H
and shall not be called into question in any court of law.
S.P.GRAMOPHONE CO. v. C.I.T. [TULZAPURKAR, J •. ] 169
A
For the·Assessment Year 1961-62 (the relevant accounting
)-· year in respect whereof ended on March 31, 1961) an applic-
cation duly signed by. all the partners seeking registration of
the firm under. sec. 26-A on the strength of the aforesaid Deed
of Partnerhsip was made on 15th September, 1960 and the
original Partnership Deed was annexed thereto. The four new B
incoming partners were examined by the I.T.O. and their s~ate
ments were recorded which, the I.T.O. felt, clearly suggested
that they were not real partners but dummies brought in to
-- avoid the higher tax incidence. After considering the several
··f clauses contained in the partnership deed, the statement of
the four new incoming partners aqd the surrounding circum-
stances including the fact that prof its had not been shown to C
have been distributed in the books and no entries 1118de in the ·
year of account, the I.T.O. rejected the application princi-
pally on two grounds: (a) that in law no valid partnership had
been created inasDllch as the element of Dlltual agency wa~
lacking and (b) factually no genuine firm has come into
existence inas1111ch as the four. new incoming partners were D
• dummies. Registration was also refused on two other grounds,
" namely, there was a breach of the terms of the Partnership
Deed in that, even in the absence of a provision in that
behalf, salary and reDllneration were credited in the personal
accounts of the two original partners Pal Singh and Sadhu
Singh and there was non-compliance of income tax rules; In E
appeal preferred by the assessee the Appellate Assistant
Commissioner after discussing the several issues at great
length confirmed the I.T.O.'s order refusing registration. In
the further appeal preferred by the assessee to the Tribunal
the view of the A.A.C. was confirmed by the Tribunal but in
doing so the Tribunal expressed the view that four new F
-.__;;,incoming partners were benamidars of Shri .Pal Singh and Shri
Sadhu Singh. At the instance of the assessee the following
three questions were ref erred to the High Court for its
opinion:
(1) Whether on the facts and in the circumstances
of the case and on a true construction of the G
instrument of partnership dated Ist April 1960 a
valid partnership came into existance?
(2) Whether on the facts and in the circumstances
of the case the assessee is entitled to regis-
tration under section 26-A of the Income Tax Act,
1922 read with Rule 6 of the Income Tax Rules , H
1922? and
170 SUPREME COURT REPORTS [19B6J 1 s.c.R.
A
(3) Whether on the facts and in the circumstances
of the case and in view of the fact that the ~
parties of the second part have been found to be
benamidars of the parties of the first part the
assessee firm is entitled to the grant of regis-
tration?
B The High Court felt that the first question referred to
it by the Tribunal did not bring into focus the real issue
that arose between the parties and therefore the same ·was
required to be recast or reframed and it reframed the question
thus:
"Whether on the ,facts and in the circumstances of
c the case, and on true construction of the instru-
ment of partnership dated Ist April, 1960 there is
a genuine partnership, and whether the finding that
there is no genuine partnership is based on evi-
dence?n
After considering the entire material on the record as also
D • the rival contentions urged before it by counsel on the either
side the High Court answered the first question in favour of :;
the department and against the assessee, that is to say, it
held that no genuine partnership had come into existence and
that the finding of the lower authorities in that behalf was
based on ample material on record. The second question was
E
also answered in the negative in favour of the department and
against the assessee. As regards the third question it was
answered in favour of the assessee and it was held that the
mere fact that the four new incoming partners were found to be
benamidars of the two original partners could not be a proper
ground for refusing registration. However, {n view of its
F answers to the first two questions particularly the first
question as reframed refusal of registration was upheld by the,>-
High Court.
This refusal to grant registration for the assessment
year 1961-62 has been challenged by the appellant-firm
(assessee) in this appeal and counsel for the assessee raised
G
three or four contentions in that behalf. On the aspect of the
firm's validity in law counsel contended that the view taken
by the taxing authorities as well as the Tribunal that no
valid partnership in law had come into existence for lack of
mutual agency has proceeded on a misconstruction of s. 4 of
the Partnership Act as also clause 5 of the Partnership Deed~-
H
in question; according to him so far as the element of mutual ~
agency is concerned all that is required to constitute a valid
firm under s. 4 is that the business must bP. carried on by all
S.P.GRAMOPHONE co. v. c.r.T. [TUl.ZAPURKAR, J, J 171
or any of them acting for all and therefore, if the control A
_I>- and management of the business of the firm was left by
agreement between the parties in the hands of even one partner
to be exercised by him on behalf of the others the legal
requirement could 'be said to have been satisfied and clause 5
of the Partnership Deed in question vests such control and
management with two partners (the two original partners) who B
would be acting on behalf of all and the mere exclusion of the
four new incoming partners from such contr:ol and management
cannot affect the validity of the- firm and in this behalf
--"" counsel relied on a decision of this Court in 'K.D. KallSth and
Co. v. C.I.T. Mysore, 82 I.T.R. 6.80, In o.ther words counsel
urged that if clause 5 of the Deed is properly read it could
not be said that there was any lack of the element of rutual C
agency. On the aspect whether a genuine firm had come into
existence or not counsel urged that the Tribunal had not
recorded any clear finding but had merely proceeded on the
basis that no valid firm in law had come into existence but
the High Court went out of its way to deal with the question
, of genuineness of the appellant-firm by recasting or reframing D
-.. the first question referred to it, and recorded an adverse
finding thereon which should not have been done by the High
Court. Counsel further pointed out that the Tribunal had
erroneously taken the view that because four new incoming
partners were benamidars registration could not be granted and
he u~ged that the High Court, having reversed that view,
ought to have held that the assessee was entitled to regis-
tration _under s. 26-A of the 1922 Act; and in this regard
counsel pointed out that the position under the 1961 Act is
different in view of the Explanation that has been inserted in
s. 185 of that Act but in the absence of any similar provision
-~ in the 1922 Act the position was well settled that a firm F
" •could not be denied registration merely because some of its
partners were benami-dars of others and in that behalf reliance
was placed on a decision of this Court in C.I.T. Gujarat v. A.
Abdual Rahim and Co., 55 I.T.R. 651. Counsel further urged·
that undue emphasis was laid on the fact that prof its of the
previous year ending March 31, 1961 had not been divided or G
distributed among all the partners by making requisite entries
in the books in the year of account and registration was
wrongly refused on this basis, though profit and loss account
and balance sheet worked out on loose sheets of papers (which
-f were unsigned) had been submitted before the authorities;
according to counsel it is not necessary that the requisite H
entries pertaining to such division or distribution of profits
172 SUPREME COURT REPORTS [19861 ; s.c.R.
A (or losses, if any) should be made in the books in the self-
same year of account and statement prepared by way of profit -i.
and loss account and balance sheet for working out such
distribution among the partners should have been. regarded as ·
sufficient evidence of actusl division of profits and in this
behalf counsel relied upon a decision of the Orissa High Court
in Rao & Sons v. C.I.T. Bihar and Orissa, 58 I.T.R. 685.
B Further counsel pointed out that such division or distribution
had been by making the relevant entries in the assessee' s
books on the first day of the followini! year and books
pertaining to the following year containing such entries were ~
produced before, us at the hearing. In. substance counsel's
contentions were that the refusal to grant registration to the
c extent that it was based on the ground that no valid partner-
ship in law had come into existence was clearly unsustainable,
that there was no evidence to justify the finding on the
genuineness of the appellant firm and that the High Court
having held that registration could not be refused merely on
the ground that some of the partners were benamidars registra-
D tion ought to have been granted to the assessee. ~
On the other hand counsel for the revenue supported the
refusal of registration by contneding that even if a valid
partnership in law could be said to have been brought into
existence by executing the Deed in question it was open to the
taxing authority to refuse registration on the ground that
E factually no genuine firm had come into existence inasmuch as
the two grounds were quite distinct from each other and
therefore assuming that some fault could be found with the
finding of the lower authorities on the question of validity
of the· appellant firm in law the refusal to grant registration
should not be interfered with as the adverse finding on the
F ,genuineness
,,
of the appellant firm, for which there was ample , >
evidence on record, was sufficient to justify the order. As
regards the reframing of the first question counsel urged that
. it is well settled that it is open to the High Court to
ref rame or recast a question formulated by the Tribunal before
- answering ,it so as to being out the real issue between the
G parties and since in this case the question No. 1 as f orllllla-
t~\i by· the Tribunal presumed or assumed the factual existence
of the appellant-firm (which were very much disputed before
the taxing authorities) the High Court reframed it so as to
bring into foclls the real issue between the parties nemely, _,_
whether a genuine firm had been constituted or not. Further ~
H counsel for the revenue pointed out that the High Court had
rightly observed that the Tribunal had, though in a circuitous
S.P.GRAMOPHONE CO. v. C.1.t. [tut.zAPURKAR, J,) 173
A
manner, taken the view that the appellant fi till had not
~· genuinely come into existence. CoUl)sel agreed that under the
1922 Act no provision similar to the Explanation to sec. 185
of the 1961 Act obtained and further fairly conceded that the
fact that some members were benamidars of others in a firl!' B
could be no bar to the grant of registration as held in A.
Abdul Rahim & Co. case (supra) but. contended that the said
aspect was not decisive of the matter and pointed out, as held
that very decision, that notwithstanding the said fact the
firm must be found to be otherwise genuine and therefore if
the taxirig authorities were to record an adverse finding on
the factual genuineness of the firm registration could be c
refused. On the point of actual division or distribution of
profits counsel urged that the la..er authorities were
justified in not relying on loose sheets indicating the
working of such distribution especially when the sheets were
unsigned and hence unauthentic and the assessee cannot be
alla..ed to fill the lacuna by producing books for the D
following year in the fifth Court. On the aspect of the
.~ genuineness of the firm requisite for the grant of registra-
tion counsel relied upon two old decisions in Baji Qw1aa
Raaul-latuda Baksh v. C.I.T. Punjab, 5 1. T.R. 506 and Bafi
Zabdul Gafoor and others v. C.I.T.C.P. & U.·P., 7 1.T.R. 625
which have been subsequently folla..ed in P.A. Raju <Jiettiar E
and Brothers v. C.I.T. Madras, 17 1.T.R. 51· and Biranand
Ra!Eukh v. C.I.T. Hyderabad, 47 1.T.R. 598; Counsel for the
revenue therefore, pressed for the dismissal of the appeal.
On a consideration of the entire material on record and
on giving our anxious thought to the rival. submissions made by
counsel on either side we are of the opinion that in the ulti- F
mate analysis the real controvet~y in the appeal centres round
~.,the question whether or not factually a genuine firm had come
into existence for the Assessment ·Year 196h62 as a result of
the execution of the instrument of partnership on April 1,
1960 and whether for recording a riegatHe 'finding thereon
against the assessee as done by the lower"";authotities there G
was evidence on the record? This beiiig the' re'al issue which
was not reflected in the first question formulated by the
Tribunal the High Court in our view was justified in reframing
that question. It is true that the taxing authorities and the
Tribunal did go into ··the question of the appellant-firm's
._ .,,._ validity in law but it cannot be disputed that. the concept of H
·l a firm being valid in law is distinct from its factual
genuin•ness and for the purpose of granting. registration both
~he aspects are relevant and must be present and one Without
'
174 SUPREME COURT REPORTS [1986] 1 S.C.R.
A
the other will be insufficient. In other words, even if a firm
brought into existence by executing an instrument of partner- -i
ship deed is shown to possess all the legal attributes it
would be open to the taxing authority to refuse registration
if it were satisfied that no genuine firm has been
constituted. Moreover, some of the provisions contained in
B such instrument may not militate against the firm's validity
in law but these can be a pointer against its factual
genuineness. The instant case is clearly a case of that type.
For instance, Clause 5 of the Partnership Deed in question
which vests the control and management of the partnership
business in the original two partners and denies to the four
c new incoming partners any right in the management or the
affairs of the accounts of the partnership business may not
show lack of the element of 1111tual agency but surely has a
vital bearing on the factual genuineness of the firm and read
along with other provisions like Clauses 3, 6, 7 and 8 would
go a long way to show that the four new incoming partners were
D not real partners but were dummies thus throwing doubt on the
genuineness of the firm. Moreover, the facts that the four new ;J
incoming partners were very close relatives of the two
original partners and that two of them were working as
employees in the erstwhile firm whose services as such were
continued in the relevant year on existing reuuneration with
E such increments as the two original partners may agree to give
cannot be lost sight of. In addition to these aspects the
statements o.f-' the four new incoming partners that were
recorded in November 1965 clearly show that they had signed
the instrument mechanically without knowing or reading, 1111ch
less, after nnderstanding the implications thereof as we shall
F indicate presently.
For instance, Hari Singh in his statement has stated that
he was not aware of the profits of the firm in any of the
three accounting years 1960-61, 1961-62 and 1962-63; he
asserted that for the relevant year 1960-61 the profit and
loss account and balance-sheet were prepared in the books and
G he had inspected these statements which assertions are
obviously false because admittedly no such profit and loss
account nor balance sheet was drawn up in the books. When
asked as to whether Pal Singh and Sadhu Singh had consulted
the incoming partners before the Deed was written out and
executed he has emphatically given a negative answer and has
H added that they (original partners) called all four of them
and asked them to sign the Deed which they did. Harbans Singh
S.P.GRAMOPHONE CO. v. C.I.T. [TULZAPURKAR, J.] 175
A
in his statement admitted that he used to do the work of
.. painting but could not say how many factories the firm was
running nor did he remember the factory in which he used to do ,
his work; he further assserted that no witnesses were called
when the Deed was signed which is obviously a false assertion.
Surj it Singh who passed his Intermediate Arts in September B
1960, B.A. in 1963 and LL.B. in 1965 has shown utter ignorance
of even the share ratio in the profit and loss of the new
incoming partners; he stated that he had two annas share in
the Profits but no share in the losses; when questioned as to
, . .. how he knew that losses were not to be shared by him he stated
that when he was a student of law he was taught that losses
should never be shared; he admitted that he had never read c
the deed which clearly shows that he mechanically signed the
· document without even attempting to know what he was signing;
he was also ignorant of the fact whether he had withdrawn his
share of profit in the first year of the partnership, i.e.
1960-61. Gulzar Singh stated that he was called from the
D
village and was asked to sign the document which he did
t without bothering to know its contents; in fact he admitted
that he knew nothing about the matter. 'lllese answers given by
the four new incoming partners clearly go to show that they
were not real partners but mere dummies and the Deed appears
to have been executed merely as a cloak to secure registration
E
and thereby reduce the tax incidence.
Counsel. for the assesee made 1111ch of the fact that prof it
and loss account and balance sheet prepared on loose sheets of
paper had been submitted before the ITO and according to him
these were wrongly rejected on the ground that requisite
entries in regard to division or d~stribution of profits had
): not been mad_e in the books in the self-same year of account,
---..(_' which counsel urged, was not necessary. It must, however, be
' mentioned that the profit and loss account statement so
prepared on a loose sheet did not contain any distribution of
profits and or allocation thereof to each one of the new
partners but such distribution or allocation was indicated on
G
a loose paper on which the balance sheet was prepared but even
that loose sheet was an unsigned piece of paper and therefore,
being unauthentic was rightly rejected by the taxing
authority. An attempt was made by counsel during the hearing
of the appeal to produce before us the books of - account
- · y· pertaining to the following year in which on the opening day
H
~ entries showing distribution of the earlier years's profit had
been made. But the late production of such books has deprived
176 SUPREME COURT REPORTS [t986J 1 s.c.R.
A the taxing authorities an opportunity to make their comments
thereon. Apart from this aspect the question would be whether _..
even such entries were genuine entfies intended to be acted
upon or mere paper entries making a show of allocation of the
share of profits due to each one of these four new incoming
partners and this would require further investigation into
relevant facts. In this context it will not be out of place to
B mention that from their statements it appears clear that none
has made any withdrawal towards his share of profit in any of
the three years, 1960-61, 1961-62, 1962-63 and even after the
partnership had alleged to have been dissolved after 31.3.1963 .....,
and at least one of them Harl Singh stated that a sum of
Rs. 73,600 became due to him as his share of profits till
c dissolution and in spite of demand nothing had been paid to
him till his statement was recorded in November 1965. Only two
of them drew their remuneration as the employees. Considering
thelr economic position it is difficult to appreciate that
they would have needed no withdrawal from their share of
profits in any year till the alleged dissolution. This aspect
D throws considerable doubt on the point whether or not entries .::J
were intended to be acted upon.
Having regard to the aforesaid discussion it is clear
that there was sufficient material on record on the basis of
which the taxing authorities as well as the Tribunal could
record an adverse finding on the genuineness of the firm
E against the assessee and registration in our view was rightly
refused.
We might observe that there was nothing wrong on the part
of the High Coutt to have confirmed the refusal of registra-
tion to the appellant firm even after holding that the fact
that some members were benamidars of others was no bar to the
F grant of registration. In A. Abdul Rahim and Co. 's case /
?--'
(supra) on which counsel for the assessee relied, the Tribunal
had held that one of the partners who had been inducted into
the erstwhile partnership was a benamidar of one of the three
original partners but had otherwise held that the partnership
was genuine and valid and therefore, this Court took·the view
.that the mere fact that one member was a benamidar of another
as no bar to the grant of registratlon and directed registra-
tion but the ratio would be inapplicable to a case where the
firm is otherwise held to be not a genuine one.
In the result the appeal fails and is dismissed with
costs.
H
A.P.J. Appeal dismiss<" 1.
.
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