1986 PLP 762 (PTD)

Rs. 24,708 (b) The year ending on 31‑5‑1954 Rs. 8,966 (c) The year ending on 31‑5‑1955 Rs. 22,260 (d) The year ending on 31‑5‑1956 Rs. 27,176 Against the above income he had the following withdrawals: (a) The year ending on 31‑5‑1953 Nil (b) The year ending on 31‑5‑1954 Rs. 1,555 (c) The year ending on 31‑5‑1955 Rs. 2,174 (d) The year ending on 31‑5‑1956 Rs. 65,533 Out of the withdrawals of the said sum of Rs.65,533 he made a gift of Rs.60, 000 to the children of Smt. Kiron Kharukha, a very distant relation. The withdrawals for the year 1958‑59 were also utilised towards the income‑tax liabilities. Even in 1958‑59 his income was shown as Rs.26,

798. In this year also a gift was made by him to a daughter of Mrs. Kharukha. He had one son but no provision was made for him or his family. He did not possess any experience in brokerage business. He had no experience of the trade. He has admitted that he has been made as partner just as a favour. (k) According to the capital account of the said K.A. Choudhury he contributed Rs.3,000 and he admitted that he was not made a partner by virtue of his capital contribution but out of sheer mercy and charity. He also admitted that the gift of large sums of money to the children of another partner, Mrs. Kharukha, was made out of the recognition of the generosity shown by Mrs. Kharukha. (1) Mr. Kharukha himself did not contribute any sum towards the firm's capital. He was really managing the business with his experience and influences and increased the volume of business and income from year to year. (m) The other partner is a lady who for obvious reasons cannot in any way conduct the brokerage business. (n) The capital amount at the end of May 31, 1957, indicates the credit balance of Rs.46,156.

8. On the basis of those finding the Income‑tax Officer has come to the following conclusion:‑ "He is just a Benamidar kept content with, the book accumulation only."

9. The Appellate Assistant Commissioner accepted the said findings of the Income‑tax Officer and observed that "Sri K.A. Choudhury was merely a name‑lender and could not be a real partner." The Appellate Assistant Commissioner came to the following conclusion: "In view of the above facts it must be held that the firm was not genuine, that Sri K.A. Choudhury was not a real partner and the claim for registration was rightly refused.

10. The Appellate Tribunal, however, for reasons stated in its order applied the principles of law laid down in Commissioner of Income‑‑tax v. A. Abdul Rahim & Co. (1965) 55 I.T.R. 651 (S.C.) and set aside the order of the Appellate Assistant Commissioner with the direction to grant renewal of registration to the assessee‑firm for the assessment year 1958‑59. ,

11. In my view, the Tribunal has come to the correct conclusion in the facts and circumstances of the present case. Before the Tribunal the only point argued on behalf of the assessee was that the partnership firm was held to be not genuine on the ground "that Sri K.A. Choudhury was a mere name‑lender, that is to say, he was a mere Benamidar". It was argued there by the counsel for the assessee that the question as to whether the income of Sri Choudhury was to be included in the name of Kharukhas was to be taken into consideration at the time of the assessment of the Kharukhas. It was argued, on behalf of the revenue, on the other hand that the refusal of registration of the partnership was done by the income‑tax authorities on the ground that "no genuine firm had come into existence" and that the question whether Sri K.A. Choudhury was a Benamidar for the Kharukhas or not was not relevant. It was submitted, on behalf of the department, that the facts in Commissioner of Income‑tax v. A. Abdul Rahim & Co. (1965) 55 ITR 651 (SC) was distinguishable inasmuch as in that case there was no dispute as to the genuineness of the firm. Before this Court also the learned counsel for the revenue has submitted that, on the facts as found by the Tribunal, the principles of law laid down in the said Supreme Court case do not apply in all force to the facts of this case. According to him, registration was really refused not only because K.A. Choudhury v Vas a name‑lender and not a true partner but also the fact that the partnership firm has been set up by way of pretence in order to escape tax. Reliance has been placed by him‑on observation of Rankin J. in Sundar Singh Majithia v. Commissioner of Income‑tax (1942) 10 ITR 457 (P.C.) at pages 461‑

62. There is no doubt that the facts in the present case are rather very ugly and it is natural to come to the conclusion that the constitution of the partnership firm and the execution of the partnership deed have been made with the ulterior object to reduce the liability to pay income‑tax. It is now well‑settled that there is nothing which prevents the assessee to take recourse to a method or device to escape tax liability if otherwise permissible in law. In my view, it is difficult to make a distinction between a name‑lender or a Benamidar. Benamidar presupposes the existence of two persons, one of whom has legal ownership and the other has beneficial ownership. But, in addition to the fact that one is a name‑lender or Benamidar, here may be various other facts which may lead to' the conclusion that the firm has been brought into existence as a subterfuge to escape tax liability‑ Section 26‑A of the Indian Income‑tax Act, 1922, only provides for the registration of a firm. Naturally, the firm should be constituted bona fide and not to use the same as a cloak to deprive the revenue of the State. Such a case would amount to a fraud on the statute. In Commissioner of Income‑tax v. A. Abdul Rahim & Co. (1965) 55 ITR 651 (SC) registration was not refused only because there was a finding of fact that the partner was a Benamidar. A Benamidar possesses a legal character. Benami transactions are common in India and the word "Benamidar" is a legal concept which has definite legal consequences. If a partner is al Benamidar and the Benamidar has executed the document as a partner in the partnership deed for the purpose of partnership transactions and for its records, the Benamidar is the person with whom the firm is concerned although by internal arrangement between the Benamidar and the real owner the profits may be diverted to the man behind the transaction, that is, the real partner. If a partnership has been constituted in accordance with the provisions of the Indian Partnership Act and if such partnership firm and a partner carries on the business as a name‑lender will have the legal character so far as the partnership firm is concerned. He will not only be the agent of the partners and the partnership firm but also he will be liable to the outside world on the ground that he is holding out himself as a partner to the outsiders. Thus, juristically speaking, a distinction between a name‑lender and a Benamidar cannot be made although the facts in different cases may lead to the conclusion that the partnership firm itself is not genuine. It is quite possible that a Benamidar or a name‑lender may be a fictitious G person having no office in fact and carrying on a sham transactions. In such a case the legal consequences would be different.

12. There is force in the argument of counsel for the revenue to the effect that apart from the question whether a particular person is a name‑lender or Benamidar the Court should find out whether a partnership firm should be refused registration under section 26‑A if the partnership itself is only sham and illusory one and, as such, the firm has been established or the deed of partnership has been executed only as a device to reduce tax liability. Reliance has been placed by him on the observation of Rankin, J. in Sundar Singh Majithia v. Commissioner of Income‑tax (1942) 10 ITR 457, 461, 462 (PC) at pages 461‑462, which reads as follows:‑‑ "When a document purporting to be an instrument of partnership is tendered under section 26‑A on behalf of a firm and application is made for registration of the firm as constituted under such instrument, a question may arise whether the instrument is intended by the parties to have real effect as governing their rights and liabilities inter se in relation to the business or whether it has been executed by way of pretence in order to escape liability for tax and without intention that its provisions should in truth have effect as defining the rights of the parties as between themselves."

13. There is no doubt that Mr. Pal's argument involves an important question of law but in my view the facts of this case and the question, as framed, do not entitle him to make such submission. It may be stated here that in the said case Rankin, J. immediately after the said observation has added: "To decide that an instrument is in this sense not genuine is to come to a finding of fact; whether there was evidence upon which it was open to the income‑tax authorities to come to such a decision is a question of law."

14. In the present case the Tribunal has come to a finding that the firm is a genuine firm under the Partnership Act and its validity has never been questioned in the long history of the assessment of this firm. The question should have been raised in the following form: "Whether the conclusion of the Tribunal to the effect that the firm is a genuine firm is based on no evidence and is perverse. If the answer is in the affirmative whether the Tribunal is justified in allowing registration of the firm?

15. But unfortunately the findings of fact have not been challenged in this case. The document has been duly executed. The shares of the partners have been specifically mentioned and the legal relationship between the partners inter se was established. There is no finding of fact that the deed of partnership is inconsistent with the provisions of the Indian Partnership Act or the relevant rules of the Income‑tax Act. It appears from the statement of case at page 3 of the paper book: "The Tribunal held that the department had pointed out no defects in the form of the partnership or that the partnership violated any of the provisions of the Partnership Act. The firm was a genuine firm under the Partnership Act and its validity has never been questioned in the long history of the assessment of this firm."

16. Even assuming that the refusal of registration is justifiable on the ground that the firm is not genuine the question as framed does not entitle the revenue to raise such a point in the present case. Reliance may be placed on Karam Chand Thapar & Bros. (P.) Ltd. v. Commissioner of Income‑tax [1971] 80 I T R 167 (SC) and K.D. Kamath & Co. v. Commissioner of Income‑tax [1971] 82 I T R 680 (SC) and also Sree Meenakshi Mills Limited v. Commissioner of Income‑tax [1957] 31 I T R 28, 51 (SC).

17. Mr. Pal has also contended that the question whether a firm is genuine or not is a mixed question of fact and law. As stated earlier, the genuineness of the partnership has not been challenged as a specific question before us. The Tribunal has come to its conclusion on the evaluation of the primary basic facts and has held that the firm is genuine. There is sufficient evidence for such conclusion and unless it is pointed out that such conclusion is based upon application of wrong legal principles, the finding cannot disturbed. The Tribunal has come to the conclusion that the firm was genuine, but one of the partners Sri K. A. Choudhury, was merely a name‑lender, that is, a Benamidar and not a real partner. As already discussed above, the distinction cannot be made between a mere name‑lender and a Benamidar unless the facts and circumstances would show that the firm is not genuine or the finding on the genuineness of the firm has been based on wrong application of legal principles.

18. Mr. Pal has drawn our attention to two exceptions in Commissioner of Income‑tax v. A. Abdul Rahim & Co. [1965] 55 I T R 651 (SC) at page 658 on which the Supreme Court did not consider it necessary to express their views on them. The Tribunal in its order has referred to the said exceptions at pages 24‑25 and has stated that neither of these eventualities are present in this case. Mr. Pal, however, has argued that there might be two cases of Benamidar: (a) Where the ostensible owner is one person and the real owner is a different person. (b) Where one person has been taken into partnership with the consent of other partners.

19. In one sense I have failed to appreciate the second contingency in view of the fact that in all cases of a partnership all partners are taken by consent of each other but Mr. Pal wants to argue that the second exception referred to in this Supreme Court case is a case where one partner has been deliberately brought, as a dummy or Benamidar of other partners with the ulterior object of reducing tax liability. it is in that sense Mr. Pal has argued that the Supreme Court case has no application to the facts of the present case. In‑my view there may be logic in the argument of Mr. Pal but as the finding of basic facts and the conclusion inferred from them have not been challenged as specific questions of law, this contention cannot be accepted. In this connection reference may be made to the observation of Venkatarama Ayyar J. in Sree Meenakshi Mills Ltd. v. Commissioner of Income‑tax [ 1957 ] 31 I T R 28 (SC) at pages 38‑39, 51.

20. Mr. Pal has also argued that Shri K.A. Choudhury is also a dummy and, as such, the principles of law laid down in Commissioner of Income‑tax v. A. Abdul Rahim & Co. (1965) 55 I T R 651 (SC) cannot be applied to the facts of the present case. He has, therefore, questioned the observations of the Tribunal in their order which reads as follows:‑‑ "Their Lordships observed that different considerations may arise in a case where the partnership is only between two persons of whom one is Benamidar of the other and in a case where the Benamidar of one partner is taken as a partner with the consent of the other partners. But neither of these eventualities are present in this case."

21. According to him, apart from the question of a partner being a Benamidar or not, if on a scrutiny of all the facts it is patent that the partnership is not a genuine one, registration of such firm can be refused under section 26‑A. In my view this contention cannot be accepted. A partnership is an agreement between the partners for carrying on a business with a view to earn profit. When a Benamidar is accepted as a partner it is also done with the consent of other) partners. If a partner is a fictitious person he cannot be called Benamidar. It is nobody's case that Sri K.A. Choudhury is a fictitious person. On the contrary, there is clear finding of fact that Sri K.A. Choudhury has paid a sum of Rs.3,000 towards the capital of the partnership business initially. This finding of fact remains un contradicted. It is true that instead of setting up a fictitious person, a person or a dummy may be set up in collusion and conspiracy with the other partners to reduce the tax liabilities. The income‑tax authorities may in such a case refuse registration. In one sense such a person may also be called a Benamidar with the consent of other partners. But in such a case there must a finding or a conclusion that the firm is not genuine in this particular case all the essential conditions of the Supreme Court case in R.C. Mitter a Son v. Commissioner of Income‑tax [1959] 36 I T R 194 (SC) have been satisfied. It is true that there are two significant facts, which the Tribunal should have noticed in coming to the conclusion that the firm is genuine: (a) The withdrawals for the first three years 1953‑54, 1954‑55 and 1955‑56 were exclusively used for the payment of taxes and out of the sum of Rs.65.533 received by Sri K.A. Choudhury in the year ending on May 31, 1956, a gift of a sum of Rs.60,000 made to the son and daughter to Mrs. Kiron Kharukha Sri Pradeep and Sri Chandralekha. Similarly in the year ending on May 31, 1957, Sri Choudhury made another gift of a sum‑of Rs.30,000 to Naintara, another daughter of Mrs. Kharukha. All these gifts were made in spite of the fact that Sri Choudhury himself has children and his financial position is such that he is not in a position to provide for them. (b) Shri Choudhury admitted before the Income‑tax Officer that all the gifts were made out of generosity by Mrs. Kharuka to admit him as a partner.

22. These facts undou4gtedly give rise to a suspicion that the partnership is not genuine. But as already discussed above there are many other finding of facts on the basis of which the Tribunal can legitimately come to the conclusion that the firm is genuine. In Commissioner of Income‑tax v. A. Abdul Rahim & Co. (1965) 55 I T R 651 (SC) Subba Rao J. has made the following observation at page 656: "In the present case the partnership was found to be a genuine one. All the formalities prescribed by the rules have been complied with. The individual shares of the partners as shown in the instrument of partnership have been specified in the application. Therefore, unless there is some legal impediment in the way of a Benamidar of one of the partners being a partner of the firm, the Income‑tax Officer would not be exercising his jurisdiction if he rejected the application for registration."

23. The learned Judge after taking into consideration the observation of Sir George Rankin in Sundar Singh Majithia v. Commissioner of Income‑tax (1942) 10 I T R 457 (PC) also stated at page 657: "In view of the finding given by the Tribunal that the instrument of partnership was genuine, it follows that it was not executed as a pretence in order to escape liability for tax, but in truth it defined the rights and liabilities of the parties between themselves."

24. These observations of the Supreme Court at pages 656 and 657 are in pari materia with the conclusion arrived at by the Tribunal in the present case. The principles laid down in the Commissioner of Income‑tax v. Abdul Rahim & Co. (1965) 55 I T R 651 (SC) have been followed in Agarwal & Co. v. Commissioner of Income‑‑tax (1970) 77 I T R 10 (SC) and also K.D. Kamath & Co. v. Commissioner of Income‑tax (1971) 82 I T R 680, 695 (SC) Further, as state above, the conclusion of the Tribunal to the effect that the partnership in the present case is a genuine one not having been challenged as being unreasonable or perverse, the law points argued by the counsel for the revenue do not have any application to the facts of the present case. Even assuming that genuineness of a partnership firm is mixed question of 'law and fact, in my view the inference drawn by the Tribunal is a possible inference inasmuch as Sri K.A. Choudhury has been held to be "name‑lender", not a real partner and, as such, a Benamidar for all practical purposes for one or both the partners. But, as discussed above, unfortunately the primary facts have not been challenged by the revenue and, as such, the contention of the learned counsel for the revenue cannot be accepted. Reliance may also be placed on Sree Meenakshi Mills Ltd. v. Commissioner of Income‑tax (1957) 31 I T R 28 (SC), Karam Chand Thapar & Bros. P. Ltd. v. Commissioner of Income‑tax (1971) 80 I T R 167 (SC) and Karnani Properties Ltd. v. Commissioner of Income‑tax (1971) 82 I T R 547 (SC).

25. For all the reasons stated above the question is answered in the affirmative and in favour of the assessee. There will be no order as to costs.

26. A.N. SEN J.‑‑I agree.

27. Questions answered in the affirmative. M. Y. H. Question answered in affirmative.