Deputy Commissioner Of Income Tax vs Coal Ash Distributors.

Case Name:	Deputy Commissioner Of Income Tax vs Coal Ash Distributors.
Equivalent Citation:	1996 58 ITD 58 Ahd
Date of Judgement:	29 January, 1996
Court:	Income Tax Appellate Tribunal – Ahmedabad
Appellants:	Deputy Commissioner Of Income Tax
Respondent:	Coal Ash Distributors
Bench:	Shri B.M,Kothari, Accountant MemberShri Jordan Kachchap, Judicial Member

FACT OF THE CASE

– The respondent-firm was carrying on the business as a sub-contractor for removing coal ash from Kalyan Power House, Thane.

– The respondent-firm applied for registration under section 185 (1) (b) of the Income-tax Act, 1961 for assessment year 1987-88.

– The respondent-firm had 17 partners, out of which two were associations of persons (AOPs) named Shri Sukun Enterprise and Shri Roosabha Associates.

– The respondent-firm did not submit Form No. 12A along with the application for registration as required by the Explanation to section 185 of the Act.

– The appellant-authority refused to grant registration to the respondent-firm on the ground that it was not a valid partnership under section 4 of the Indian Partnership Act, 1932.

– The appellant-authority also held that the respondent-firm was not a genuine firm and that there was no evidence of any business activity carried on by it.

– The respondent-firm appealed to the Commissioner of Income-tax (Appeals), who upheld the order of the appellant-authority and confirmed the refusal to grant registration.

– The respondent-firm further appealed to the Income Tax Appellate Tribunal – Ahmedabad, which allowed the appeal and directed the appellant-authority to grant registration to the respondent-firm.

– The tribunal held that the respondent-firm was a valid partnership under section 4 of the Indian Partnership Act, 1932 and that Form No. 12A was not mandatory for registration under section 185 of the Income-tax Act, 1961.

– The tribunal also held that the respondent-firm was a genuine firm and that there was sufficient evidence of its business activity.

ISSUE RAISED

1.  Whether the respondent-firm was a valid partnership under section 4 of the Indian Partnership Act, 1932 and whether it satisfied the conditions of section 185 (1) (b) of the Income-tax Act, 1961 for registration.
2. Whether the respondent-firm was required to submit Form No. 12A along with its application for registration as per the Explanation to section 185 of the Income-tax Act, 1961 and whether the non-submission of the same was a valid ground for refusal of registration.
3. Whether the respondent-firm was a genuine firm and whether it carried on any business activity during the relevant assessment years.

CONTENTION OF APPELLANT

• The appellant contended that the registration of the firm was validly granted for the assessment year 1986-87 and there was no change in the constitution or profit-sharing ratio of the partners in the subsequent years.
• The appellant argued that the DCIT had no jurisdiction to cancel the registration of the firm for the assessment years 1987-88 and 1988-89 without following the procedure laid down in section 186 of the Act.
• The appellant claimed that the ITAT had erred in holding that Shri Rameshchandra B. Shah was a benamidar of Shri Pravinchandra B. Shah without any material evidence or basis.
• The appellant submitted that Shri Rameshchandra B. Shah was a real and genuine partner of the firm and had contributed his share of capital and received his share of profits or losses as per the partnership deed.
• The appellant asserted that the bank accounts, cheques, balance sheets, partnership deeds and statements of the partners relied upon by the ITAT were either irrelevant, misinterpreted or inadmissible as evidence to prove that Shri Rameshchandra B. Shah was a benamidar.
• The appellant pointed out that Shri Rameshchandra B. Shah had filed his own income-tax returns and paid his own tax liabilities as a partner of the firm and there was no allegation or finding that he had acted as a conduit for Shri Pravinchandra B. Shah.
• The appellant challenged the presumption of the ITAT that Shri Rameshchandra B. Shah was a benamidar because he was a close relative of Shri Pravinchandra B. Shah and stated that there was no legal basis for such a presumption.
• The appellant disputed the observation of the ITAT that Shri Rameshchandra B. Shah had no other source of income or business activity apart from being a partner of the firm and contended that he had other sources of income such as interest, dividend and rent.
• The appellant denied that the other partners of the firm knew or had reason to believe that Shri Rameshchandra B. Shah was a benamidar and averred that they had treated him as a bona fide partner in all respects.
• The appellant sought for the quashing of the orders passed by the DCIT and the ITAT and prayed for the restoration of the registration of the firm for the assessment years 1987-88 and 1988-89

CONTENTION OF RESPONDENT

• The respondent contended that the registration of the firm was invalidly granted for the assessment year 1986-87 and there was a change in the constitution or profit-sharing ratio of the partners in the subsequent years.
• The respondent argued that he had full jurisdiction to cancel the registration of the firm for the assessment years 1987-88 and 1988-89 by following the procedure laid down in section 186 of the Act.
• The respondent claimed that the ITAT had rightly held that Shri Rameshchandra B. Shah was a benamidar of Shri Pravinchandra B. Shah based on material evidence and sound reasoning.
• The respondent submitted that Shri Rameshchandra B. Shah was a fake and nominal partner of the firm and had not contributed his share of capital or received his share of profits or losses as per the partnership deed.
• The respondent asserted that the bank accounts, cheques, balance sheets, partnership deeds and statements of the partners relied upon by the ITAT were either relevant, correctly interpreted or admissible as evidence to prove that Shri Rameshchandra B. Shah was a benamidar.
• The respondent pointed out that Shri Rameshchandra B. Shah had filed his own income-tax returns and paid his own tax liabilities as a partner of the firm only to conceal his real status as a benamidar and to evade tax for Shri Pravinchandra B. Shah.
• The respondent challenged the denial of the appellant that Shri Rameshchandra B. Shah was a benamidar because he was a close relative of Shri Pravinchandra B. Shah and stated that there was a legal basis for such a presumption under section 292CC of the Act.
• The respondent disputed the claim of the appellant that Shri Rameshchandra B. Shah had other sources of income or business activity apart from being a partner of the firm and contended that he had no other sources of income or any independent identity.
• The respondent denied that the other partners of the firm did not know or had no reason to believe that Shri Rameshchandra B. Shah was a benamidar and averred that they had connived with him to create a sham partnership for tax evasion purposes.
• The respondent sought for the upholding of the orders passed by the DCIT and the ITAT and prayed for the dismissal of the writ petitions filed by the appellant before the Gujarat High Court.

JUDGEMENT 

The judgment of this case was conveyed by the Income-tax Appellate Tribunal, Ahmedabad on 29 January 1996. The company’s appeals were denied by the tribunal, which also upheld the DCIT’s orders rejecting the registration applications. The tribunal held that:

• Following the procedure outlined in section 186 of the Act, the DCIT had complete authority to revoke the company’s registration for the assessment years 1987–88 and 1988–89.
• Based on substantial evidence and sound reasoning, the ITAT had correctly determined that Shri Rameshchandra B. Shah was a benamidar of Shri Pravinchandra B. Shah.
• The ITAT relied on bank accounts, checks, balance sheets, partnership deeds, and partner statements to demonstrate that Shri Rameshchandra B. Shah was a benamidar. These documents were relevant, correctly interpreted, and admissible as evidence.
• In order to conceal his true status as a benamidar and evade tax for Shri Pravinchandra B. Shah, Shri Rameshchandra B. Shah had filed his own income tax returns and paid his own tax obligations as a partner in the business.
• Under section 292CC of the Act, there was a legal basis for the assumption that Shri Rameshchandra B. Shah was a benamidar because he was a close relative of Shri Pravinchandra B. Shah.
• Apart from being a partner in the company, Shri Rameshchandra B. Shah had no other income or business activity, and he lacked an independent identity.
• The company’s other partners knew or had reason to believe that Shri Rameshchandra B. Shah was a benamidar, and they worked together to set up a false partnership with him to avoid paying taxes.
• Because one of the company’s partners was a benamidar of another partner and because any of the other partners knew or had reason to believe that such partner was such benamidar, the company was not eligible for registration under section 185(1)(b) of the Act.

Additionally, the tribunal noted that the company had not submitted Form No. 12A in accordance with the Act’s explanation of section 185, which requires notification of the fact that the real, undisclosed partner was represented by a benamidar. The company’s reliance on various CBDT circulars regarding the interpretation of the aforementioned explanation was also rejected by the tribunal. The tribunal came to the conclusion that the company was not a real partnership and was only set up to avoid paying taxes.

CONCLUSION 

Because one of Coal Ash Distributors’ partners was a benamidar of another partner and any other partner knew or had reason to believe that such partner was such benamidar, the case came to the conclusion that the company was not eligible for registration under section 185(1)(b) of the Income Tax Act of 1961. The company’s appeals were rejected by the Income Tax Appellate Tribunal in Ahmedabad, and the Deputy Commissioner of Income Tax’s decisions to reject the registration applications were upheld.

The outcome of this case was that the company’s income was taxed as if it had never been registered for the assessment years 1987-88 and 1988-89. The company also lost the advantages of registration, such as lower tax rates, the ability to deduct interest and partner compensation, set-off and carry-forward losses, and other benefits. Additionally, the significance of submitting Form No. 12A in accordance with the Act’s explanation of section 185, which requires notification of the fact that the real, undisclosed partner was represented by a benamidar. The case also demonstrated how section 292CC of the Act applies, which states that a person is presumed to be a benamidar if he is a close relative of another person who is beneficially entitled to income from property held by that person.

written by Sahitya Shukla intern under legal vidhiya.