COMMISSIONER OF INCOME-TAX vs. JUPITER CONSTN. CO.

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ITR/236/1991HC GujaratGJHC24013469199102 December 2004Author: HONOURABLE MR. JUSTICE D.A.MEHTA,HONOURABLE MS. JUSTICE HARSHA DEVANI5 pages
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What did the High Court hold?

The High Court answered the question of law in the affirmative, in favour of the assessee and against the revenue. The Court relied on the Supreme Court's decision in "Rashik Lal & Co. Vs. Commissioner of Income-Tax, [1998] 229 ITR 458". The Court reiterated the principles laid down in that judgment, emphasizing that an application for registration of a firm must be made under Section 184 of the Income Tax Act, requiring the partnership to be evidenced by a written instrument, specifying individual shares, and signed by all partners. The Court held that even if a person joins a firm as a representative of an HUF or any other body, within the firm, their position is that of an individual. Any agreement with a third party to divide profits does not bind the firm or alter the partners' position under the Partnership Act or Income-tax Act. The Court noted that a partner may occupy a dual position: personal capacity qua the partnership and representative capacity qua third parties. The third parties represented by a partner cannot enforce rights against other partners, nor can other partners enforce rights against such third parties. Given these principles and the facts found by the Tribunal, the High Court found no infirmity in the Tribunal's order.

What were the facts?

The assessee, Jupiter Constn. Co., is a registered firm. For the accounting year ended March 31, 1983, the firm sought registration. The firm was initially constituted on June 2, 1980, with three individuals and three trustees representing private trusts as partners. Registration was granted for assessment year 1981-1982. During the relevant period, the trustees retired and joined the newly constituted firm as Managers of their respective Associations of Persons (AOPs), with resolutions passed by the AOPs. The Assessing Officer refused registration, deeming the firm not genuine as the individuals representing AOPs were not the real partners, some AOP members were minors, and the AOPs were formed solely to reduce tax liability. The Appellate Assistant Commissioner allowed the appeal, directing registration. The Tribunal upheld this decision, finding compliance with statutory requirements and citing Supreme Court judgments.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the assessee is entitled to registration? (Question of law) Assessee's Contention: The judgment does not record specific arguments made by the assessee before the High Court. However, the Tribunal's reasoning, which was upheld, indicates that the assessee likely argued that all statutory requirements for registration were met, and the Assessing Officer's grounds for refusal were invalid based on established legal precedents. Revenue's Contention: The revenue contended that the firm was not genuine because the individuals representing the AOPs were not the real partners, some members of the AOPs were minors, and the AOPs were constituted with the sole objective of reducing tax liabilities. The revenue challenged the orders of the lower appellate authorities.

Which sections of the Income-tax Act were involved?

Section 256(2),Section 185,Section 184

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

INCOME TAX REFERENCE No.236 of 1991

For Approval and Signature:

HON'BLE MR.JUSTICE D.A.MEHTA and HON'BLE MS.JUSTICE H.N.DEVANI

============================================================ 1. Whether Reporters of Local Papers may be allowed : NO to see the judgements?

2.

To be referred to the Reporter or not? : NO 3. Whether Their Lordships wish to see the fair copy : NO of the judgement?

4.

Whether this case involves a substantial question : NO of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder?

5.

Whether it is to be circulated to the concerned : NO Magistrate/Magistrates,Judge/Judges,Tribunal/Tribunals?

-------------------------------------------------------------- COMMISSIONER OF INCOME-TAX Versus JUPITER CONSTN. CO. -------------------------------------------------------------- Appearance: 1. INCOME TAX REFERENCE No. 236 of 1991 MR MANISH R BHATT for Petitioner No. 1 SERVED BY RPAD - (N) for Respondent No. 1 --------------------------------------------------------------

CORAM : HON'BLE MR.JUSTICE D.A.MEHTA and HON'BLE MS.JUSTICE H.N.DEVANI

Date of decision: 02/12/2004

ORAL JUDGEMENT

(Per : HON'BLE MR.JUSTICE D.A.MEHTA)

1.

This is a reference under Section 256(2) of the Income Tax Act, 1961 (the Act) made by the Income Tax Appellate Tribunal Ahmedabad Bench 'A' at the behest of the Commissioner of Income Tax, Gujarat-III, Ahmedabad. The following question of law has been referred for the opinion of this Court :-

"Whether on the facts and in the circumstances of the case, the assessee is entitled to registration?"

2.

The respondent assessee is a registered firm and the relevant accounting year is the year ended on 31-03-1983. It appears from the facts recorded by the Tribunal that the assessee firm was brought into existence on 02-06-1980 wherein apart from three individuals viz. Shri Hasmukhlal Chinubhai, Shri Bipinchandra Mafatlal and Shri Natwarlal Trikamlal the other three partners were trustees of private trusts viz. Shri Upendra Chinubhai, Trustee of Hetal Trust, Smt. Smruti Hasmukhbhai, Trustee of Bijal Trust and Smt. Shantaben Chinubhai, Trustee of Shalin Trust. The said firm was granted registration under Section 185 of the Act by order dated 18-02-1984 when the said partnership firm was assessed for assessment year 1981-1982. 3. During the accounting period under reference there was a change in the constitution of the firm and Shri Upendrabhai Chinubhai, Smt.Smruti Hasmukhlal and Smt.Shantaben Chinubhai, who were representing their respective Trusts in the capacity as the Trustees, retired from the firm. The said three individuals, however, joined the newly constituted firm w.e.f. 01-04-1981 in their capacities as Managers of their respective Association of Persons (AOPs). The said three individuals who were also members of their respective AOPs had joined as partners in light of the resolution passed by the respective AOPs. Registration under Section 185 of the Act was sought for by preferring application in Form No.11 which was duly signed by all the partners and accompanied by a copy of the partnership deed as required by the relevant provisions of the Act and the Rules. The Assessing Officer, however, was of the opinion that registration could not be granted to the partnership firm as the firm was not a genuine firm because the aforesaid three individuals, representing their respective AOPs, were not the real partners. That some of the members of the said AOPs were minors. That the AOPs had been constituted with the sole object of reducing the tax labilities. He, accordingly, refused

registration.

4.

The said order came to be challenged by way of appeal before the Appellate Assistant Commissioner of Income Tax, AR-III, Ahmedabad, who for the reasons stated in the order dated 12-06-1985, allowed the appeal and directed the Assessing Officer to allow the registration to the assessee firm.

5.

Revenue challenged the order of the first appellate authority by way of appeal before the Tribunal and the said appeal came to be registered as I.T.A. No.1827/Ahd/1985. The Tribunal held that the assessee firm had complied with the statutory requirements prescribed for seeking registration, and the Assessing Officer had not found any fault with the said application. That the ground regarding minor being a member of the AOPs was not valid in light of the decision of the Apex Court in the case of M.M. Ipoh & Ors. Vs. Commissioner of Income-Tax, Madras, [1968] 67 ITR 106. Similarly, it was not open to the Assessing Officer to take into consideration the arrangement between a partner of the firm and a stranger to the firms. That such partners' liability qua such third parties as against the other partners of the firm was different in light of the ratio in the decision of Hon'ble Supreme Court in the case of Commissioner of Income-Tax, Madras Vs. Bagyalakshmi & Co. [1965] 55 ITR 660. The Tribunal Match Exporting Co., [1964] 53 ITR 204. The Tribunal, therefore, upheld the order of the first appellate authority.

6.

Mr.M.R.Bhatt, learned Senior Standing Counsel appearing on behalf of the applicant - revenue, has been heard. Though served, there is no appearance on behalf of the respondent - assessee. Mr.Bhatt has very fairly pointed out that the controversy is no longer res integra in light of the decision of the Hon'ble Supreme Court in the case of Rashik Lal & Co. Vs. Commissioner of Income-Tax, [1998] 229 ITR 458 wherein the Court has laid down as under :-

" The application for registration of a firm has to be made under section 184 of the Income-tax Act. It is specifically provided that:

(1) the partnership must be evidenced by an instrument in writing;

(2) the individual shares of partners must be specified in that instrument;

(3) the application for registration shall be signed by all the partners.

The very facts that individual shares of the partners have to be specified and that such partners must personally sign the partnership deed and also the application for registration, go to show that even if a person joins a firm as a representative of a Hindu undivided family or any other body or association, within the firm his position is that of an individual. He may have an agreement with a third party to divide the profits received from the firm, but that agreement does not bind the firm nor does it alter the position of the partners under the Partnership Act or the Income-tax Act. This aspect of the matter was explained by Subha Rao J. (as his Lordship, then was), in the case of CIT V. Bagyalakshmi and Co. [1965] 55 ITR 660 (SC) in the following words (page 664) :

"A partnership is a creature of contract. Under Hindu law a joint family is one of status and right to partition is one of its incidents. The income-tax law gives the Income-tax Officer a power to assess the income of a person in the manner provided by the Act. Except where there is a specific provision of the Income-tax Act which derogates from any other statutory law or personal law, the provision will have to be considered in the light of the relevant branches of law. A contract of partnership has no concern with the obligation of the partner to others in respect of their shares of profit in the partnership. It only regulates the rights and liabilities of the partners. A partner may be the karta of a joint Hindu family; he may be a trustee; he may enter into a sub-partnership with others; he may, under an agreement, express or implied, be the representative of a group of persons; he may be a benamidar for another. In all such cases he occupies a dual position. Qua

the partnership, he functions in his personal capacity; qua the third parties, in his representative capacity. The third parties, whom one of the partners represents, cannot enforce their rights against the other partners nor the other partners can do so against the said third parties.""

7.

In light of the aforesaid settled legal position and the facts found by the Tribunal there being no infirmity in the order of the Tribunal the question referred to the Court is answered in the affirmative i.e. in favour of the assessee and against the revenue.

8.

The Reference stands disposed of accordingly. There shall be no order as to costs. [ D.A.MEHTA,J ] [ H.N.DEVANI,J ]

* * * 'Bhavesh'

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