1988 PLP (Trib (PTD)

(6) Farhat Naheed (Minor) 10% (7) Aamar Sajjad (Minor) 10% (8) Abdul Hadi (Minor) 10% The firm continued and had been treated as such till the assessment year 1983-84. In the assessment year under consideration the firm was re-constituted in which the major partners remained the same. The minors who had been admitted to the benefits of partnership namely, Babar Rehman, Aamar Sajjad and Abdul Hadi were eliminated and a new minor namely Khalid was admitted to the benefits of the partnership. It may be noted that the assessee-firm has taken on lease a commercial building known as Plaza Chamber. The lease money is Rs.88,

200. From the facts of the case it appears that the assessee sub-leases the property and receives rent. It has also been claimed that the assessee has made certain investment on making improvements and had also undertaken repairs of the building. The gross receipts declared by the assessee were at Rs.2,29,300 and after claiming various expenses net profit was declared at Rs.54,236.

3. The assessing officer as well as the learned A.A.C. rejected the claim of the assessee on the ground that the firm was not genuine. The assessing officer came to this conclusion solely on the ground that the object of the constitution of the firm was to avoid the incidence of tax. It was conceded that the assessee had fulfilled all the technical formalities required by law. It may be noted that there is no objection, by the assessing officer either in regard to the fulfilment of the requirements as contained in subsection (2) and (3) of section 6% nor there is any objection that the division of profit has not been Made according to the terms and conditions of the partnership deed. The only objection of the assessing officer was that the owners of the building, who are related to the partners of the present firm, had devised this method so that the gross rent of the property might not be taxed under section 19 of the I.T.O. Ordinance as income from property. The learned A.A.C. has maintained the order of the I.T.O.

4. The learned counsel for the assessee contended that the I T O. had no jurisdiction to refuse the grant of registration for the reason stated by him. It was contended that under subsection (4) of section 68 what the I.T.O. was required to see was; (1) Whether the firm had been constituted by an instrument of partnership deed; (2) Whether the said instrument specified, among other things, the shares of the partners; (3) Whether the firm had been registered under the Partnership Act, 1932 or an application to that effect had been made; (4) Whether the application for grant of registration is in such form and is accompanied by such documents and verified in the manner and was made on or before such date as had been prescribed; (5) Whether the genuine firm was in existence, in the relevant income year, constituted as shown in the instrument of partnership deed.

5. It was submitted that other formalities having been fulfilled and there being no objection to that effect, the Assessing Officer had limited jurisdiction to see as to whether the firm was a genuine firm constituted as shown in the instrument of partnership deed. As to what was the object and whether it was for avoidance of tax, has no relevancy whatsoever for grant of registration.

6. The second contention of the learned counsel for the assessee was that the assessing officer had contradicted himself when he himself assigned the status of an A.O.P. while making the assessment for the relevant assessment year. He submitted that by assessing the status of an A.O.P. the I.T.O. acknowledged that the various partners, who constituted the firm, had been working together as members of the A.O.P. Therefore the genuineness of the persons who constituted the firm being the same as members of the- A.O.P. it could not be said that the firm was not genuinely constituted. On the last mentioned point the learned counsel relied upon the decision of Karachi High Court in C.I.T. v. Hussain Corporation, Karachi reported as 1983 P T D

289. In that case the High Court in similar circumstances observed as under:-- "We may also mention here that in spite of the fact that the I.T.O was of the view that the partnership was not, genuine one but still he assessed the firm as A.O.P. under section 10 of the Income-tax Act. After reading the orders of the two authorities below we are convinced that this circumstance alone was sufficient for the reversal of the finding of the I.T.O. in the case".

7. The learned" Departmental "Representative on the other hand vehemently contended 'that the commercial building known as Plaza Chambers is owned by certain members of the family who devised a method to reduce the incidence of tax. Consequently, instead of offering the income for tax purposes; they have constituted this bogus firm and leased out the property for a nominal amount and thus the entire transaction .by constitution of the firm is a sham, transaction and therefore the I.T.O. was right in refusing to grant registration.

8. We have considered the contentions of the rival parties. The contentions raised by the learned counsel for the assessee have considerable force. Under subsection (4) of section 68 the I.T.O. ' powers to see whether the firm was genuine or not is restricted. According to that provision the I. T. O. has to see whether the genuine firm as constituted under the instrument of partnership was existence. Therefore, what the' I. T.O. has to see at the time of granting registration is, whether the firm is constituted in accordance with the partnership deed or not. The I.T.O. had not raised any objection in this regard. On the contrary he had conceded that all the formalities and requirements have been fulfilled. Not only that, in the assessment year 1978-79 when the registration was granted for the first time to this firm the assessing officer discussed in detail each and every partner and then held the firm as genuine and granted registration. It is to be noted that all the major partners are the same as before. One of the minor namely Farhat -who had been admitted to the benefit of partnership earlier is also the same in the present firm. The only new addition on whom any attack could be made is another minor namely Khalid. His investment of Rs.50,000 also appears to have been accepted by the I.T.O. as his mother Shamim Akhtar has filed an affidavit stating that her husband Asghar Ali was serving in Saudi Arabia and she had arranged the amount of investment. This lady (the mother of the minor) is also stated to be a tax-payer in Contractor Circle-I, Zone-A, Lahore at N. T. Number 2888.

9. The question is whether a firm duly constituted under an instrument of partnership fulfilling all the requirements required by section 68 of the Ordinance and the firm having been constituted in accordance with the instrument of partnership, can' be refuse registration merely on the ground that the object of the firm is to avoid or to reduce the incidence of tax. To our mind such an inference cannot be drawn from the wording of subsection (4) of section 68 oil the I.T. Ordinance. It may be that the assessee had made this clever device to reduce the incidence of tax but such a device being' within the four corners of law, the registration could not be refused on that ground as it is not permissible by law. In Commissioner Income-tax v. Sivkasi Match Exporting Company reported as (19640 53-I T R 204 a similar question arose before the Supreme Court of India. While dealing with the question of genuineness of the firm, the Supreme Court observed at page 211 that "it is not an attempt to evade tax, but a legal device to reduce its tax liability". Then in the same judgment at page 217 the following observation was made by the Supreme Court. "It is true that the object of enacting section 26-A and the rules relating to the procedure for registration is to prevent escapement of liability to tax. But it is not necessary that before an order refusing registration is made, it must be established that there was evasion of tax attempted or actual. It is always open to a person, consistently with the law, to, so arrange his affairs that he may reduce his tax liability to the minimum permissible under the law. The fact that the liability to tax may be reduced by the adoption of an expedient which the law permits, is wholly irrelevant in considering the validity of that expedient". Similar view was taken by the Supreme Court of India in C.I.T. v. A. Rehman a Company reported as (1967) 67 I T R 11 in which it was held that avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed, is not prohibited by the Income-tax law and the tax payer is entitled to resort to a device to divert the income before it accrues to him and effectiveness of the device depends not upon considerations of morality, but on the operation of the Income-tax Act. It was further held that case that Legislative injunctions may not be violated in the Taxing Statute but it may lawfully be circumvented. Again same view was taken in Aruna Group of Estates v. State of Madras reported as (1965) 55 I T R 642 by the Madras High Court. The following observations made at page 648 of that case may be of interest to quote: "Avoidance of tax is not tax evasion and it carries no ignominy with it for it is sound law and, certainly, not bad morality, "for anybody to so arrange his affairs as to reduce the brunt of taxation to a minimum".

10. As mentioned above subsection (4) of section 68 only gives a limited jurisdiction to the I.T.O. to see whether a genuine firm had been constituted as shown in the instrument of partnership. Therefore, the I.T.O's power extends only to this extent that he has to examine whether the firm was constituted in accordance with the instrument of partnership. He cannot go beyond the partnership deed. In the present case there is no objection of the I.T.O. that the firm is not constituted in accordance with the instrument of partnership. It may be stated that in the earlier years the assessing officer held the firm as genuine by examining each and every Partner's case. Even for the present assessment year the I.T.O. had assigned the status of an A.O.P., which implies that so far as the partners are concerned their genuineness has not been doubted. The reasoning of the officers below is based on assumption and suspicion and the conclusion that the firm was not a genuine firm is the result of the suspicion that the firm had been constituted in order to avoid the incidence of tax while there is no legal infirmity either in the constitution of the firm or in the genuineness of the firm as shown in the instrument of partnership. The learned assessing officer seems to have been considerably obsessed by the supposed motive of the assessee that the firm had been constituted with the object of lessening the incidence of taxation. Even if it be assumed to be so, though there is no evidence on record to this effect apart from suspicious and conjuctures even then this is not a sufficient ground to refuse registration of the firm as not genuine. In the facts and circumstances of this case, I am of the view that it was wrongly held by the I.T.O. that there was no genuine firm constituted as shown in the instrument of Additionally the law laid down by the Karachi High Court in C.I.T. v. Hussain Corporation Karachi (supra) applies on full force in this case as well.

10. For the foregoing reasons, it is directed that the registration should be granted to the firm unless the assessing officer finds some other fault or, deficiency as required by section 68 of the Income Tax` ordinance. M.B.A./453/T Registration granted.