COMMISSIONER OF INCOME-TAX VS D.K. TRADING CO.
2001 P T D 380
[238 I T R 887]
[Gujarat High Court (India)]
Before R. Balia and A.R. Dave, JJ
COMMISSIONER OF INCOME‑TAX
versus
D.K. TRADING CO.
Income‑tax Applications Nos.282 to 286 of 1998, decided on 13/04/1999.
(a) Income‑tax‑‑‑
‑‑‑‑Reference‑‑‑Firm‑‑‑Registration‑‑‑Whether or not firm genuine. and whether or not formed as device to evade tax‑‑‑Finding of fact‑‑‑No question of law arises‑‑‑Indian Income Tax Act, 1961, S.256.
Where the Tribunal found on the facts, inter alia, that the Assessing Officer had made no enquiry about the genuineness of the firm nor given any finding thereon in the order passed, that with the dissolution of the association of persons all its assets and liabilities were taken over by the assessee‑firm and the capital of the members of the association of persons was brought into the firm by the partners constituting the firm, that the business as carried on thereafter was not as per terms of the indenture of the association of persons, but as per terms of the partnership deed, that at the close of the year the profit was divided not as per the share ratio provided in the association of persons deed but it was divided as per the share ratio provided in the partnership deed, that the firm as constituted on May 1, 1985, continued till today and that the dissolution of the association of persons and the constitution of the firm was for bona fide reasons and no scheming was involved with the object of evading tax:
Held, that a finding as to the existence of the firm as genuine and not as a device for the purpose of avoidance of tax or a part of a scheme, was purely a finding of fact and could not be said to give rise to any question of law nor could it be said, even prima facie, from the material which had gone into consideration before the Tribunal, that it could give rise to a question of law as to the perversity of the finding of fact.
(b) Income‑tax‑‑‑
‑‑‑‑Reference‑‑‑Same business on separate business‑‑‑Whether or not two concerns interdependent for purpose of clubbing income‑‑‑Finding of fact‑‑ No question of law arises‑‑‑Indian Income Tax Act, 1961, S.256.
Where the Tribunal found that the capital acquisition by the independent, entities was genuine and was not disputed by the Revenue at any stage, and that the assessee‑firm maintained complete quantity record of the goods purchased and sold evidenced by audited accounts, though the associate concerns whose income was sought to be clubbed did not maintain quantitative details; that all the entities independently existed prior to the constitution of the firm and were being so assessed; that the associated concerns had not only business dealings with the assessee‑firm but with outside agencies; and that there was no interlocking and interlacing of the funds, and refused to draw inferences of oneness merely on the basis of the fact that the respective proprietors of the different business entities were members of the same family, the business was being carried in the same premises and there were inter se trading activity as well:
Held, that whether the incomes of the entities were to be clubbed was a question of fact depending upon the appreciation of evidence and inference drawn by the Tribunal. It could not be said that the inference drawn by the Tribunal from the material before it was such to which no reasonable person could reach, or that the findings of facts had been arrived at by ignoring relevant material or by irrelevant consideration which would vitiate the finding of fact and require reconsideration of the facts by the Court. Therefore, no question of law arose from the Tribunal's order directing the Assessing Officer to exclude the income of the sister concerns clubbed with the income of the assessee.
Manish R. Bhatt for the Commissioner.
JUDGMENT
Heard learned counsel for the applicant. These are applications under section 256(2) of the Income Tax Act, 1961, at the instance of the Commissioner of Income‑tax, Gujarat, relating to the assessment years 1986‑87 to 1990‑91. He requires this Court to direct the Tribunal, to submit a statement of case and refer the following questions of law which are identical in all the applications and said to be arising out of its appellate order relating to the assessment years 1986‑87 to 1988‑89, in appeals filed by the Revenue and in relation to the assessment year 1990‑91 in appeal filed by the assessee in the same set of facts and circumstances:
"(1) Whether, the Appellate Tribunal is right in law and on facts in confirming the order passed by the Commissioner of Income‑tax (Appeals) directing the Assessing Officer to adopt the status of the assessee as that of a registered firm?
(2) Whether the Appellate Tribunal is right in law and on facts in directing the Assessing Officer to exclude the income of the sister concerns clubbed with the income of the assessee?
(3) Whether, the Appellate Tribunal ought not to have appreciated that the assessee‑firm was not genuine and was a ruse or device to avoid tax liability?"
The Tribunal has rejected the application under section 256(1) on the ground that no question of law arose out of the order relating to the assessment orders and all questions are questions of fact.
D.K. Trading Company was being assessed as an association of persons until the assessment year 1985‑86. It was dissolved on July 1, 1985. Before D.K. Trading Company was constituted as a firm with effect from May 1, 1985. The partnership deed was executed on April 11, 1985. Each partner had a 25 per cent. share in the profit and loss of the firm. Another association of persons, Deepkala Silk Palace also stood dissolved on May 17, 1985, and its business was also taken over by a newly‑constituted firm. The firm was registered. The partners of the firm are members of the same family, so also the members of the association of persons. The members of the family to which partners of the newly‑constituted firm belong were as on the date of constitution of the firm carrying on independent businesses. Deepkala Novelty was owned by its proprietor, Silky P. Shah, Deepkala Arts owned by proprietor, Silvy P. Shah, Deepkala Economy owned by its proprietor, Nilay P. Shah. The other two businesses were being run in the status of association of persons in the name of Deepkala Fashion and Deepkala Selection, having other members of the family as members of the association of persons. The fact that the members had independent capital to contribute for running this business had nowhere been disputed at any stage of the proceedings. A search has been conducted on the premises owned by the family in which all the different businesses named above were being run. The Assessing Officer without deciding the application for registration of the firm under the Income‑tax Act, without holding an enquiry and giving a finding as to the genuineness of the firm held that the dissolution of the association of persons was with a view to avoid the tax and considering the material before it primarily on the proximity of relationship between their partners/proprietors, and that different businesses were carried on in the same premises and paying the different rentals to the owner of the property who were also members of the family on the basis of commission on sales and considering that all the apparent different trading interests have a common closing stock and interdependence as to finances, there is interlocking and interlacing of the business activity, clubbed the income of the other six businesses named above Deepkala Silk Palace‑‑association of persons having already been dissolved and acquired by the firm in question, made assessments on that basis in the status of association of persons. On appeal by the assessee for the assessment years 1986‑87 to 1989‑90, the Commissioner of Income‑tax (Appeals) found in favour of the assessee holding that the constitution of the firm is genuine. It fulfils all the conditions for grant of registration, directed the Assessing Officer to register the firm and found the business activity of each of the different entities to be genuine and independent and further finding that there is no‑interlocking and interlacing of the finance of the business activity found against the clubbing of income of different entities.
Aggrieved by the order of the Commissioner of Income‑tax (Appeals) the Revenue went in appeal before the Tribunal relating to the assessment years 1986‑87 to 1989‑90. For the assessment year 1990‑91, the Commissioner of Income‑tax (Appeals) on the very same material decided against the assessee and affirmed the order of the Assessing Officer. That is how for the assessment year 1990‑91 the assessee was in appeal before the Income‑tax Appellate Tribunal.
The Assessing Officer has also assessed all the seven entities separately on protective measure on the basis of returns submitted by them. The Commissioner of Income‑tax (Appeals) in the case where it found in favour of the assessee further directed to treat the protective assessment to be substantive assessments and set aside the assessment made in the status of association of persons by clubbing different interests of the members.
The Tribunal by a common order, decided all the appeals. After referring to the material placed before it and recording submissions made by the respective parties it found that the Assessing Officer had made no enquiry about the genuineness of the firm nor he has given any finding thereon in the order passed. It found that none of the partners at any stage has denied being partner in the firm nor any of them has claimed a share in the firm at variance with that specified in the partnership deed. Further there is no evidence brought on record to establish that any of the partners was a benami of another partner or another person. It further noticed that prior to dissolution of the association of persons the firm had come into existence disclosing the names of the individuals who were partners of the firm. From this the inference was drawn by the Tribunal that it cannot be considered to be a continuation of the old association of persons nor dissolution of the association of persons which has taken place subsequent to the formation of the firm can be treated as a device. The Tribunal further found that with the dissolution of the association of persons all its assets and liabilities were taken over by the assessee‑firm and the capital of the members of the association of persons was brought in the firm by the partners constituting the firm. The business as carried on thereafter was not as per terms of the indenture of the association of persons, but it was carried on as per terms of the partnership deed. Further, at the close of the year the profit was divided not as per the share ratio provided in the association of persons deed but it was divided as per the share ratio provided in the partnership deed. It has also found that the firm as constituted on May 1, 1985, continues till today and that itself proves that the dissolution of the old association of persons and constitution of the firm was for bona fide reasons. It also found that all the requisite formalities for getting the firm registered under the Income‑tax Act has also been completed and duly complied with. It, therefore, reached the finding that the dissolution of the old association of persons and the constitution of the firm was for bona fide reasons and no scheming was involved with the object of evading tax. It thus, found no merit in the reasoning given for adopting the status as an association of persons.
A finding as to the existence of the firm as genuine and not as a device for the purpose of avoidance of tax or a part of a scheme, is purely a finding of fact and cannot be said to give rise to any question of law nor can it be said even prima facie from the material which has gone into consideration before the Tribunal that it could give rise to a question of law as to the perversity of the finding of fact. In these circumstances, we are of the opinion, so far as questions Nos. 1 and 3 and relating to the finding about the status of the assessee as that of registered firm and not of old association of persons and consequential direction to the Assessing Officer to grant registration of the firm under the Income‑tax Act does not give rise to a question of law and the order of the Tribunal refusing to refer to such question cannot be said to be erroneous.
The other question which has been required to be referred relates to the clubbing of the incomes of different entities in the hands of the association of persons. We finding on a close reading of the finding recorded in this respect by the Tribunal that it has considered all the material placed before it in the light of submissions made before it and the finding as to the existence of different entities independent of each other particularly keeping in view the fact that the capital acquisition by the independent entities are genuine and not disputed by the Revenue at any stage, and that while the assessee‑firm maintained complete quantity record of the goods purchased and sold evidenced by the audited accounts though the associate concerns whose income was sought to be clubbed did not maintain quantitative details as it was not practical for them to maintain the closing stock details, quantity and quality‑wise, that all the entities independently existed prior to the constitution of the firm and were being so assessed; the associate concerns had business dealings not only with the assessee‑firm but with outside agencies; there being no interlocking and interlacing of the funds, it refused to draw inferences of oneness merely on the basis of the fact that the respective proprietors of the different business entities were members of the same family, the business was being carried in the same premises and there were inter se trading activity as well, which was found to be reciprocated by consideration as per market value of the goods purchased or sold.
In our opinion, this question too is a question of fact depending upon the appreciation of evidence and inference drawn by the Tribunal. It cannot be said that the inference drawn by the Tribunal from the material before it was such to which no reasonable person could reach the conclusion to which the Tribunal has reached or that the findings of facts have been arrived at by ignoring relevant material before it or by irrelevant consideration, which would vitiate the finding of fact and require reconsideration of the facts by this Court. The contentions raised by the applicants ace all in the realm of appreciation of evidence which has been considered by the Tribunal.
We, therefore, find that the Tribunal was right in law in refusing to refer all the questions under section 256(1) of the Act.
Accordingly, there is no merit in these applications and they are hereby rejected.
M.B.A./164/FC
Applications rejected.