1987-VIL-54-ITAT-AHM
Equivalent Citation: ITD 023, 570,
Income Tax Appellate Tribunal AHMEDABAD
Date: 08.03.1987
INCOME-TAX OFFICER.
Vs
SAMIR BUILDERS.
BENCH
Member(s) : M. A. A. KHAN., P. J. GORADIA.
JUDGMENT
Per Shri M.A.A. Khan, Judicial Member --- These appeals, as also many others of the same group which we heard along with these appeals, are directed against the order of the Appellate Assistant Commissioner of Income-tax, Ahmedabad (AAC). The common question involved is whether in the facts and circumstances of the case the respondent firm was entitled to the grant of registration u/s 184/185 of the Income-tax Act, 1961 (hereinafter referred to as ' the Act ') or not. The concerned Income-tax Officer (ITO) held that it was not but in appeal the learned AAC opined that it was. The controversy is now before us.
2. During the years under consideration the respondent firm carried on business in construction. While filing the returns of income applications for registration in Form No. 11 were also duly moved. On making a scrutiny of the partnership deed and the registration application, the ITO noted that all the partners of the respondent firm were partners in their representative capacities as managers of their respective Association of Persons (AOP) which among others, consisted of certain minor members as well. The ITO further noted that in all such AOPs, 95 per cent share of the members was determinate while the rest 5 per cent was indeterminate going to a ' Reserve Fund ', as it was named. The ITO was of the view that these representative partners were not independent in their working in the firm and had to seek instructions and guidance from their respective AOPs from time to time. Doubting the genuineness of the constitution of the Respondent firm, the ITO called upon it to explain the above matters.
3. Relying mainly on the ratio of Supreme Court decision in the cases of CIT v. Bagyalakshmi & Co. [1965] 55 ITR 660 and Agarwal & Co. v. CIT [1970] 77 ITR 10, the Respondent firm asserted that its representative partners may successfully hold dual capacities without affecting their rights and liabilities in the firm. It was claimed that by their becoming partners in the firm as representatives of their respective AOPs, all the members of such AOPs, including minors, do not become partners in the firm so as to subject the minors to losses of the firm. It was further explained that the 5 per cent indeterminate share of the members of the AOPs was not at all going to adversely affect either the genuineness or the very constitution of the Respondent firm.
4. Apprehending that the ITO may possibly refuse registration, the Respondent firm approached the IAC as well through its reference application u/s 144A of the Act drawn on almost the same lines. However, the IAC declined to issue the desired instructions requiring the ITO not to refuse registration to the Respondent.
5. In the authoritative pronouncements made in the cases of---
(i) Ladhu Ram Taparia v. CIT [1962] 44 ITR 521 (SC)
(ii) Hiralal Jagannath Prasad v. CIT [1967] 66 ITR 293 (All.)
(iii) Agarwal & Co.'s case
(iv) CIT v. Hari Om Co. [1972] 86 ITR 216 (All.)
(v) J.K. Hosiery Factory v. CIT [1971] 81 ITR 557 (All.)
the Income-tax Officer found ample powers to himself to inquire into the genuineness of Respondent firm and its constitution as specified in the instrument of partnership. On doing so, the ITO found the following factual position and expressed himself thus in the last but one para of his order :
" In the course of assessment proceedings, the assessee had filed particulars of resolutions passed by the members of AOPs in the course of the meetings held by them. It is seen that the meetings of the members of most of the AOPs were held on one day and at one time and at different places. As per resolutions passed, the members are supposed to be present at different places at the same time. In all the cases as many as 4 to 5 resolutions were passed in the meeting and all the resolutions passed are similarly worded. Except for the change in the name of the members, place of the meeting, name of the AOP, the date & time of the meeting is same. The members forming the AOP are created with the sole object of reducing the IT liabilities as these firms have in fact, not done any business as such but have undertaken all the contracts from one entity and passed it on to another entity (sub contract). These facts have not been rebutted by the assessee's representative. This is only mentioned with a view to see whether these firms are really genuine, leave apart valid."
6. It was thus on his enquiry into the genuineness of the respondent firm and its constitution as specified in the instrument of partnership, authorised and sanctioned by the express provisions of section 185(1) of the Act, that the ITO had found it as a matter of fact that the members forming the constituent AOPs, were in fact the members of one family and that the AOPs were created with the sole object of reducing income-tax liability. The ITO had further categorically found that the respondent firm had in fact not done any business as such save that of undertaking the construction ---contract from one entity and passing the same to another. Thus, having scrutinised the matter from legal as well as factual aspects, the ITO refused registration to the respondent firm u/s 185(1)(b) of the Act. The aggrieved respondent approached the learned AAC in appeal.
7. Before the learned AAC the case appears to have been argued more on legal points than on factual position. After examining a number of English & Indian cases, relevant to the legal points involved, the learned AAC recorded the following principles of law in para 20 of his order :
" 20. The above discussion shows that :
(a) The AOPs are artificial juristical persons and are legal entity and comes under definition of persons of Section 4 of the Partnership Act. They are competent to form partnership---
As per Section 4 of Partnership Act read with Section 3, Clause 39 of General Clauses Act X of 1897 and section 2(31) of the IT Act. The relevant case law is Hakam Rai v. Ganga Ram AIR 1926, Lahore 340, 94 IC 633.
(b) The legal entities and artificial persons like AOP can enter into an agreement of partnership provided that they are empowered to do so by their constitution. The various deeds of agreement shows that the AOPs are empowered to enter into partnership. The various AOPs have passed the resolution to this effect authorising their Manager to enter into contract of partnership.
As per SC in case of Hakamrai and Narot v. Benard 4 Ruse 247.
(c) The requirement of formation of valid AOP is that " The Members of Association must join together for purpose for producing an income. The violation on the part of members of Association is an essential ingredient.
As per SC in case of G. Murugesan & Bros. v. CIT [1973] 88 ITR 432.
(d) For defining ' persons ' in partnership Act and Income-tax Act resort has to be taken of General Clauses Act X of 1897. Section 3 Clause 39 of this Act defines the word ' persons ' which includes AOPs also---
As per Supreme Court in case of M.M. Ipoh v. CIT [1968] 67 ITR 106.
(e) The AOP can have minor as one of the members. There is nothing in the Income-tax Act which indicate that a minor cannot become a member of Association of Persons for the purpose of Income-tax Act also---
As per Supreme Court in cases of CIT v. Laxmidas Devidas [1937] 5 ITR 584 and M. M. Ipoh's case.
(f) The AOP can be brought into existence by law or by agreement. It is also not necessary that agreement should be registered---
As per Federal Court in case of Punjab Province v. Federation of Pakistan [1957] 32 ITR 498.
(g) When the representative of the legal entity or artificial juristical person enters into partnership with strangers the other members do not ipso facto become partner in that firm---
As per Supreme Court in the case of Firm Bhagat Ram Mohanlal v. CEPT [1956] 29 ITR 521.
(h) For a firm to be genuine the following conditions are to be fulfilled :
(i) there must be an agreement entered by all the persons or through their representatives who are competent to enter into agreement ;
(ii) the agreement should be to share profits and losses of business or profession ;
(iii) the business must actually be carried on---
As per Supreme Court in cases of Phulchand Ratanlal v. CIT [1976] 103 ITR 174 and Agarwal & Co. v. CIT [1970] 77 ITR 10.
(i) The ITO has duty to scrutinise and satisfy himself that a firm is genuinely constituted. But it is not proper on his part to display undue skepticism---
As per Supreme Court in case of A.M. Abdul Rahaman Rowther & Co. v. CIT [1965] 56 ITR 556.
(j) The registration should not be refused on bare suspicion. If the partnership exists in accordance with the deed then it cannot be held as not genuine even though there may be minor deviations from the deed. The registration should not be refused on surmises and conjectures---
As per Supreme Court in case of Umacharan Shaw & Bros. v. CIT [1959] 37 ITR 271.
(k) In considering the applications for registration the ITO should not consent to determine in whom the beneficial interest in the share in the partnership vests---
As per Supreme Court in case of CIT v. Sir Hukamchand Mannalal & Co. [1970] 78 ITR 18.
(l) It is open for partner to give apportion of his share to another by constituting even a sub-partnership---
As per Supreme Court in case of CIT v. Bagyalakshmi & Co. [1965] 55 ITR 660.
(m) Even if the deed of partnership is drawn to avoid proper taxation it cannot be a ground for refusing registration---
As per High Court of Nagpur in case of Seth Suwalal Chhogalal v. CIT [1949] 17 ITR 269."
8. Applying the above principles to the case of respondent firm the learned AAC felt satisfied that there was a genuine firm in existence. He further observed in para 21 that " by various deeds of agreement different AOPs have come into existence legally and genuinely. They are legal and juristical persons, whole as a unit of persons and is (are) capable of entering into contract for the purpose of Section 4 of Partnership Act. The minors can be members of HUF (AOP) and all the members of AOP do not become ipso facto partners in the firm ".
9. However, on factual aspect of the case the learned AAC observed that " the finding of the ITO regarding resolution at a place and worded in a similar fashion is based on undue suspicion, surmises and conjectures ", in the opinion of the learned AAC " the assessee has all the right to arrange his affairs in such a way that there is minimum tax liability on whole of their family members " (Emphasis supplied)
10. One more factor appears to have weighed with the learned AAC. In the last sentence of para 21, he observed that :
" Moreover, each partner AOPs are assessed as if the firm in which they are partner is registered and therefore the registration to the firm in which they are partners is to be granted even as per Supreme Court in case of CIT v. Murlidhar Jhawar & Purna Ginning & Pressing Factory [1966] 60 ITR 95. "
11. Thus, in the final analysis the learned AAC held that the ITO was not justified in refusing to grant registration to the Respondent firm. He, therefore, granted the required registration and directed the ITO to make a finding to that effect as per rules.
12. Mr. N. K. Shukla, the learned Senior D. R., vehemently urged that the soundness of the principles of law enunciated by the learned AAC in Para 20 of the order under appeal can hardly be disputed but the question is whether they may apply to the facts and circumstances of the present case. The respondent firm in these appeals, contended Mr. Shukla, was one of the so many concerns of a larger group of closely held concerns carrying on business in the same line under different names and in the facts and circumstances attending on the creation of a large number of AOPs and partnership firms on the same day and on the same manner it was not much difficult to read colourable devices to defraud the Revenue. Therefore, in understanding the true impact and the legal nature of the documents evidencing the creation and/or constitution of the member AOPs and the resultant agreement of partnership, it would not be enough, urged Mr. Shukla, to take each and every act of the Respondent in that direction in isolation and judge the validity thereof at the altar of the principles of law enunciated by the learned AAC in Para 20 of the order. But the question of genuineness of the respondent firm and its constitution as specified in the instrument of partnership shall have to be examined as a whole along with all the relevant facts and circumstances attending on the creation and constitution of the present firm and the like firms of the same group with a view to seeing what was the object and true intent of the parties concerned in entering upon such transactions. Judged in that way, argued Mr. Shukla, it would be crystal clear that the firm in question as also so many other firms of this group simply existed on papers only and were brought in existence as mere tools to serve the dubious object and purpose of tax evasion. On these lines of reasoning and arguments the learned D. R. supported the order of refusal to grant registration to the respondent firm, as rendered by the ITO, and assailed that of the learned AAC.
13. As against the above, Mr. J. P. Shah, the learned counsel for the respondent, reiterated almost the same arguments as were advanced before the authorities below. It was submitted that on proceeding step by step it would be seen that the member of AOPs were validly constituted entities. Law permits a minor to become the member of an AOP through his guardian. And that was the case here. Again, it was permissible at law that a member of an AOP may join a partnership firm in his representative capacity. There was nothing bad in that. A partner may have double capacity, one qua the partnership and the other qua others. His being answerable to his AOP does not at all effect his rights and duties in the firm. By his becoming a partner in a partnership firm in his representative capacity, all the members of the AOP do not ipso facto become partners in the firm. There is thus no question of subjecting a minor member of an AOP to the losses incurred by the firm. Then again, it is no concern of the partnership to see as to where its partners take their shares of profit or losses and to whom and in what proportion do they distribute them amongst the persons whom they were representing. Mr. Shah thus urged that the Respondent firm was a genuine and validly constituted firm and the learned AAC has been perfectly justified in undoing that which was done illegally by the ITO. Mr. Shah further submitted that there was no question of adopting any device to evade or avoid tax liability. The respondent firm carried on its own business under a genuine deed of partnership and there could be no ground to refuse registration to it.
14. Above, at the time of hearing these appeals, it was brought to our notice that the respondent firm was one of the concerns of a larger group of concerns carrying on business on the same line. On making perusal of the orders of the authorities below and hearing the learned counsels for the parties, we felt convinced that the decision of the appeals rests on the factual position. For the soundness of the principles of law, as summarised by the learned AAC in para 20 of his order, are not in dispute. What could be and in fact is in dispute is their applicability to the facts and circumstances of the present case. If on appreciation of the evidence on record it is found that the Respondent firm was one of the concerns of a larger group of concerns, brought into existence to serve as a tool to avoid tax no number of isolated pieces of legal principles would be helpful as no court can accord its approval to an attempt to defeat the law. Thus, in the context of the question before us it became all the more necessary to acquaint ourselves with the relevant facts. We must record our thanks to Mr. Shukla for Revenue and to Mr. Shah for the assessee who were kind enough to place the relevant facts before us through their respective voluminous paper books, containing some charts and annexures also.
15. A study of the material placed before us discloses that five different families of Ahmedabad (as described in Annexure A1 to Annexure A5) comprising of more than 60 members, thought of a scheme, sometimes in May or June, 1980, to enter into the business of constructing tenements. That being their common object or purpose these five families constituted themselves into a group. Before we proceed further, we must acquire some knowledge about these five families.
15.1 The ' GAJJAR FAMILY ' (Annexure A-1) consisted of about 16 members. In this group S/Shri Shakarchand S. Gajjar and Amritlal S. Gajjar are said to be the main persons. The rest of the members included their brothers, wives, sons and daughters.
15.2 The ' PATEL FAMILY ' consisted of about 14 members. Shri Rambhai B. Patel is stated to be working as the main person in this group. Smt. Nathiben Rambhai, Shri Upendra Rambhai, Minor Neeta Rambhai, Minor Avil Rambhai, Shri Kanubhai Rambhai and Jyotesna Rambhai are his family members. The rest are the relatives of this Patel family.
15.3 The ' DESAI FAMILY ' consisted of about 11 members. In this family Mahendra K. Desai and Sharad K. Desai, brothers inter se are said to be the main persons. Smt. Arunaben M. Desai, Minor Approva M. Desai and Ashish M. Desai are the members of the family of Mahendra K. Desai while Vasantiben S. Desai and Minor Akash S. Desai are the family members of Sharad R. Desai. Shardaben K. Desai may be the mother of the two brothers. The remaining persons are said to be the close relatives of the two brothers.
15.4 In the ' THAKKAR FAMILY ', Jayantilal Chunnilal Thakkar and Dayabhai Fhunnilal Thakkar again brothers inter se, are stated to be the main persons. Smt. Sumitraben J. Thakkar, Minor Vijay J. Thakkar, are the members of the family of Jayantilal C. Thakkar and Narainbhai D. Thakkar and Bhanuben D. Thakkar of Dayabhai C. Thakkar. Rest are said to be the relatives of the families of these two brothers. This group also consists of 11 members.
15. 5 In ' MODI FAMILY ' group Rasiklal Kalidas Modi is the main person. Vijayben R. Modi, Rohitkumar R. Modi, Bharatbhai R. Modi and Dhirankumar R. Modi are his family members while the rest are stated to be their close relatives. This group consists of eight members.
16. Now coming back to the point under consideration, it is gathered from the conducts of and the acts done by the members of the five families mentioned above that in order to put their idea into practice they thought of floating a good number of AOPs to be constituted by permutation and combination of the members of all these five families. These AOPs would send one or two of their members to one or more partnership firms as representative-members of the concerned AOPs. The partnership farms so constituted by the representative-members of those families would work in a definite line of succession. At the first level there were to be the organising concerns whose work would be to purchase land, to formulate the housing scheme and to mobilise the finances. At the second level there were to be certain concerns to work as First Contractors. The work of these First Contractors was to get contracts for construction work from the organising concerns only to pass on such contracts to yet another line of concerns who were to work as Second Contractors at lesser rates. In their turn the concerns forming second line of contractors were still to pass on the construction contracts to yet another line of concerns which may be called as Third Contractors at another lesser rates. This third line of contractors was to get the work done. It was in this way that the first and second lines of contractors were to do no work save passing over the construction contracts to the third line of contractors.
17. The idea conceived and thought of being acted upon in the manner mentioned above was put in practice on the 3rd day of June, 1980. It was on this auspicious day that the group of the five families is stated to have floated as many as 174 AOPs as mentioned in Annexure-B. The common features of all these AOPs are that they were created/constituted on the same day, may be at the same time and place, by similarly worded documents, containing same or similar terms and conditions. Another common feature was that each of the AOP had the members of one particular family as its members and such members were related to each other as mentioned in clause No. 26 of the agreement deeds and consisted of females and minors as well. Then again each was to have 95 per cent of its net profit or loss as determinate and known while the rest 5 per cent was to be indeterminate and unknown to be accumulated in a Reserve Fund Account (per clause 13). The right of the members of AOP in the ' Reserve Fund Account ' and other assets of the AOP were to be regulated thus as per clauses 14 and 15 of the agreement deeds :
" Clause 14. No member of the association shall have any definite or specific right in the ' Reserve Fund Account ' created as mentioned in para 13(a). The members of the association by majority decision, taken in the meeting held for such purposes may be decided to such amount, at such time, to such manner and in such proportion as may be decided in the said meeting.
15. No member of the association has any definite specific right in any of the assets of the association and/or shall have no right, demand or claim to receive any of the assets or any part thereof. The members of the association by majority decision taken in meeting held for such purposes may decide to distribute assets or part thereof as may be decided or may distribute such portion of the assets and/or part thereof to such members in such proportion as may be decided in that behalf. A member of the association shall only be entitled to hold, possess and enjoy the right as member which are conferred upon firm from time to time."
The main objects for which these AOPs were formed were :
" Clause 4(i) to carry on business or business either in proprietorship or in partnership or otherwise as builders, contractors, organisers, developers, and also trading in all items related to above mentioned business."
18. In order to carry out their above objects all the AOPs, on the same 3rd day of June, 1980, passed certain resolutions. By one of such resolutions each of the AOPs resolved to become partner in one or the other partnership firm, named in the resolution as well as in the agreement deed forming the AOP, by contributing certain specified sum, say Rs. 1,000 less or more by way of preliminary investment. Annexure ' C ' shows the names of the members of these AOPs in the partnership firms to be constituted.
19. As a third and final step towards the fulfillment of their objectives, the group of the said five families constituted as many as 34 or more partnership firms again on the same 3rd day of June, 1980. A list of the firms so constituted is available in Annexure. D. The common salient features of the partnership deeds were that the firms were constituted only by the representative-members of the AOPs mentioned in Annexure-C, their declared nature of business was to carry on business as building contractors/material suppliers, society organisers, estate brokers and general merchants and commission agents, they were to be at will, none of their partner was to have any right to goodwill and none of the partners was prohibited from carrying on a competitive business in the same line.
20. The above narration of facts clearly establishes that :
(i) On the 3rd day of June, 1980 a large number of AOPS, may be 174 or even more, were formed by similarly worded instruments of agreements.
(ii) all such AOPs were constituted by permutation and combination of the members of the five families mentioned above.
(iii) all the AOPs were having certain minors as their members.
(iv) all the AOPs had agreed to keep 5 per cent of their net profits and losses as indeterminate and unknown.
(v) no member of the AOPs was to have any definite specific right either in the indeterminate share of 5 per cent or in the assets of the AOPs.
(vi) resolutions authorising one or more members of the AOPs to represent their respective AOPs in partnership firms were passed, again on 3-6-1980.
(vii) the representative members had formed 34 or even more partnership firms by permutation and combination, that again on 3rd day of June, 1980.
(viii) the main object of all such partnership firms was to carry on business in the same line and none of the partnership firm prohibited any of its partner to carry on a competitive business, and
(ix) the manner and method of forming such a large number of AOPs and partnership firms by permutation and combination of the members of the same five families on the same day i.e. 3-6-1980 suggests that the business activities of all the firms were a joint venture of and controlled by the group constituted by the said 5 families.
21. It may be pointed out that all the AOPs and the partnership firms were formed/constituted at or about one and the same time and possibly at one and the same place. The firms could not have come into existence earlier to the formation of the AOPs as the representative members of the AOPs only had/were to become partners of the firms. And the representative members could not have been authorised until and unless the relevant resolutions were passed. Curiously enough the deeds of agreement creating the AOPs contain the names of representative member who was to be nominated only after passing the resolution. A resolution could not have been passed earlier to the formation of the AOP itself. Then again the name of the partnership firm which a representative member was authorised by resolution to join could not have been mentioned in the resolution until and unless the partnership firm to be joined by such representative member had already come into existence. But the resolution contained the name of ' then non-existent ' firm. All this shows that it was a drama of one day, one time and possibly one place being played by the members of the families in a most systematic and planned way with the oblique motive of avoiding taxes. A large number of AOPs and partnership firms were formed only to serve as a tool of a colourable scheme drawn out to play fraud on law, and to defraud the revenue by evading the payment of due taxes. This conclusion is amply fortified by the subsequent working of these partnership firms so constituted by this group of five families.
22. It has been pointed out above that the partnership firms were to work in a definite line of succession and in a most systematic and planned way. In order to understand and appreciate the modus operandi of this group of concerns, of which the Respondent Firm is one of the units, making simply a part of the whole, it would be worthwhile to refer to Annexures E to L, as submitted on behalf of Revenue. A study of these annexures clearly reveals that M/s. Laxmi Corporations, M/s. Vijay Development Corporations and M/s. Vijay Estate Corporation, three of the concerns of this group, worked as ' Organising concerns '. M/s. Laxmi Corporation formulated two schemes under the names of Satya Sai Krupa Co-op. Housing Society and Sai Krupa Co-op. Housing Society and entrusted the work of construction of the tenements under these schemes to two other concerns of this group viz. M/s. Srinath Constructions and M/s. Bhagirath Constructions at a specified price. Similarly M/s. Vijay Development Corporation and M/s. Vijay Estate Corporation formulated two similar schemes under the names of ' Indirbag Co-op. Housing Society ' and ' Dharna Vijay Co-op. Housing Society ' respectively. M/s Vijay Development Corporation entrusted the job to M/s. Bhagyodya Construction while M/s. Vijay Estate Corpn. to M/s. Bamsidhar Construction Co. and M/s. Vipin Construction Co. All the six concerns, to whom the construction contract/work was given by the organising concerns may conveniently be called as ' First Contractors '. They all belong to this family of concerns formed by permutation and combination of the members of the five families through the mode of AOPs.
23. It is further gathered that all the six ' First Contractors ' did not do the construction work by themselves but further transferred the work to yet another line of concerns of the group at lesser rates. Such concerns were (1) M/s. Arvindha Builders, (2) M/s. Alkesh Builders, (3) M/s. Porvi Builders, (4) Mls. Poornima Builders, (5) M/s. Pramanik Builders, (6) M/s. Sushila Builders, (7) M/s. Sujit Builders, (8) M/s. Jasmina Builders, (9) M/s. Jayant Builders, (10) M/s. Ridhi Builders, (11) M/s. Rushi Builders, (12) M/s. Asit Builders, (13) M/s. Rakesh Builders, (14) M/s. Sanatam Builders, (15) M/s. Samir Builders (the Respondent), (16) M/s. Rachna Builders, (17) M/s. Jayesh Builders, (18) M/s. Bipin Builders, (19) M/s. Akshay Builders, (20) M/s. Ami Builders, (21) M/s. Bharat Builders, (22) M/s. Janak Builders, (23) M/s. Rasik Builders, (24) M/s. Sudesh Builders, (25) M/s. Amar Constructions, (26) M/s. Sagar Constructions, (27) M/s. Radh Constructions, (28) M/s. Mahesh Constructions, (29) M/s. Amrutha Constructions, (30) M/s. Alpa Constructions, (31) M/s. Bipin Constructions, and (32) M/s. Ranna Constructions. All these concerns may conveniently be called as ' Second Contractors '.
24. The concerns forming the list of Second Contractors also did not do the job and transferred the work, again at lesser rates, to yet another line of concerns. These concerns were (1) M/s. Deep Builders, (2) M/s. Vishal Builders, (3) M/s. Anil Builders, (4) M/s. Pavak Builders, (5) M/s. Pragati Builders, (6) M/s. Vishwakarma Builders, (7) M/s. Hemal Builders, (8) M/s. Alpa Corporation, (9) M/s. Gayatri Corporation, (10) M/s. P.G. Constructions Co., (11) M/s. Sahajanand Constructions, and (12) M/s. L.R. Constructions. These concerns finally got the construction work done.
25. Annexures E, F & G show as to at what rates the various contracts of constructing various types of tenements were had by the three types of contractors. The difference in the contract moneys indicates the profit earned by 1st & 2nd lines of Contractors without doing any business same to transfer the contracts received from the organising concerns to other concerns of the same group. The difference between the contract moneys of the First Contractors and the Third Contractors comes to Rs. 33,10,340 in the construction of tenements under the banner of Satya Sai Krupa Co-op. Housing Society & Sai Krupa Co-op. Housing Society, to Rs. 35,39,336 in the case of construction of tenements of Indrabag Co.-op. Hous. Society and to Rs. 24,79,275 in the case of tenements of Dharana Vijay Co-op. Housg. Society.
26. From the above details of relevant particulars regarding the ' modus operandi ' of this group of concerns it is not difficult to conclude that the various concerns of this group were functioning in a most systematic, planned and coordinated manner and in a definite line of succession. The large number of AOPs and the large number of firms, both constituted on one and the same day by permutation and combination of the members of the said five families were given birth only to minimise the tax effect on earned profits. Again, by paying tax at maximum marginal rates on the indeterminate and unknown 5 per cent of their net profits the members of the AOPs brought themselves to a position where no taxes at all and if at all at minimum rates only were payable by them as individuals. In that behalf they could have successfully invoked the provisions of section 86(v) of the Act for their benefit. Under these circumstances Revenue seems to be correct in its statement in Annexure ' J ' showing highest estimated tax paid by this group at Rs. 16,42,740 as against its correct and legal liability of Rs. 46,64,475 during a few years of its working.
27. The above discussion brings us to hold that the principal object and the true intent behind the formation of a large number of AOPs and good number of partnership firms of this group of five families was to evade the payment of taxes. The formation of the AOPs and the constitution of firms, of which the Respondent firm is simply one, was done under a well-planned, though ill-advised, scheme designed to defeat the law and defraud the Revenue. The AOPs were to serve no purpose other than sending their manager-members to some partnership firms to bring un-earned profits to be divided in such a way that the tax collector shall have to return disappointed from their doors. The large number of firms were simply to serve the purpose of distributing the profits of the cumulative and combined adventure at certain levels in a definite line of succession so as to reduce the tax liability on earned profits to the minimum. It was all a tax-avoidance scheme consisting of a series of well-planned and pre-arranged steps. The Respondent-firm, as also others, was an integral part and a tool of this colourable scheme. It was all a device in the direction of avoiding tax. That being the true nature of the series of transactions, carried out by the members of the five families, dissection of their scheme and then considering the validity and genuineness of each individual transaction with the help of the isolated principles, pointed out by the learned AAC in para 20 of his order is not at all possible and even desirable. We hold that the Respondent firm was not genuinely and validly constituted and therefore no genuine firm with the constitution specified in the partnership deed dated 3-6-1980 existed in the years under consideration.
28. In his approach to the question involved in this case, the learned AAC seems to have been influenced by the doctrine propounded by Lord Tomlin in IRC v. Duke of Westminster [1936] AC 1 " that every man is entitled if he can to order his affairs so as that the tax attracting under the appropriate Acts is less than it otherwise would be " and followed in India in CIT v. A. Raman & Co. [1968] 67 ITR 11 (SC), CIT v. B.M. Kharwar [1969] 72 ITR 603 (SC) and in some other case. The doctrine expounded by Lord Tomlin was long back given a deserving and befitting burial in the land of its birth in W.T. Ramsay Ltd. v. IRC [1981] 1 All ER 865, IRC v. Burmah Oil Co. Ltd. [1982] STC 30 (sic). In India too Desai J. of Gujarat High Court recorded a sign of departure from that principle in Wood Polymer Ltd., In re./Bengal Hotels (P.) Ltd., In re. [1977] 47 Comp. Cas 597 by refusing to accord sanction to the amalgamation of companies as that would lead to avoidance of tax. The departure was completed by the Supreme Court in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148, where it was observed that " We think that the time has come for us to depart from the Westminster principle as emphatically as the British courts have done " and to dissociate ourselves from the observations of Shah J. and similar observations made elsewhere. The evil consequences of tax avoidance are manifold. First, there is substantial loss of much needed public revenue, particularly in a welfare State like ours. Next, there is the serious disturbance caused to the economy of the country by the piling up of mountains of black money, directly causing inflation. Then there is " the large hidden loss " to the community (as pointed out by Master Sheatcroft in 18 Modern Law Review 209) by some of the best brains in the country being involved in the perpetual war waged between the tax-avoider and his expert team of advisers, lawyers and accountants on the one side and the tax gatherer and his perhaps not so skilful advisers on the other side. Then again there is the " sense of injustice and inequality which tax avoidance arouses in the breasts of those who are unwilling or unable to profit by it ". Last, but not the least is the ethics (to be precise, the lack of it) of transferring the burden of tax liability to the shoulders of the guideless, good citizens from those of the " artful dodgers ". It may, indeed, be difficult for lesser mortals to attain the state of mind of Mr. Justice Holmes, who said, " Taxes are what we pay for a civilized society. I like to pay taxes. With them I buy civilisation." But, surely, it is high time for the judiciary in India too to part its ways from the principle of Westminster and the alluring logic of tax avoidance. We now live in a welfare State whose financial needs, if backed by the law, have to be respected and met. We must recognise that there is behind taxation laws as much moral sanction as behind any other welfare legislation and it is a pretence to say that avoidance of taxation is not unethical and that it stands on no less a moral plane than honest payment of taxation. In our view, the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it."
29. Need we add that in presence of the above position of law today, the doctrine propounded in Westminster's case does not fit in the context of our socio-economic philosophy. That is why the Gujarat High Court stresses in CIT v. Smt. Minal Rameshchandra [1987] 30 Taxman 282 that in the context of developing economy of fast changing socio-economic conditions of people even the words occurring in a State are required to be interpreted differently. And the Kerala High Court declares in Neroth Oil Mills Co. Ltd. v. CIT [1987] 33 Taxman 249 that the traditional rules governing the construction of taxing statutes and their application to the affairs of taxpayers may still be applicable but not to the cases involving tax avoidance or tax deferment schemes. This trend of judicial approach on the subject on hand seems to be in line with the very purpose of law as declared by Supreme Court in S.P. Gupta v. President of India AIR 1982 SC 149 and which is that law is intended to serve a social purpose and it cannot be interpreted without taking into account the social, economic and political setting in which it is intended to operate. In view of this trend of judicial approach on vital problem of the State affecting the interest of the community at large the very approach of the learned AAC to the factual as well as legal aspect of the case stands vitiated and we disapprove of the same emphatically.
30. The learned AAC further seems to have upheld the claim of the Respondent firm on another ground. In para 21 he states :
" Moreover, each partner AOP, are assessed as if the firm in which they are partners is registered and therefore the registration to the firm in which they are partners is to be granted even as per Supreme Court decision in the case of CIT v. Murlidhar Jho war & Purna Ginning & Pressing Factory [1966] 60 ITR 95."
31. Before we examine the applicability of the ratio of the Supreme Court decision cited, let us find out the factual position.
31.1 The ITO passed the assessment order in the case of the firm on 30-3-1984, treating the firm as unregistered. By another order of the even date he assessed the AOP partner of the firm wherein he observed that :
" In these circumstances this AOP is not considered a genuine partner in the said firm. However, since this AOP has declared income from partnership share, the same is taxed here on protective basis with the finding that taxing the income in this case will not prejudice the action that may be taken/might have been in the case of the firm in which this AOP is shown as a partner." (Emphasis supplied)
(Pages 68 to 71 of assessee's paper book)
32. It is crystal clear that the ITO had made the assessment of AOP partner of the Respondent firm on " Protective basis " only. The statement of the AAC in para 21 thus obviously runs counter to the factual position because the protective assessment of AOP partner was set aside in appeal only on 7-3-1986 and that too on the strength of AAC's order under appeal dated 31-7-84.
33. Coming to the Supreme Court decision, relied upon by the learned AAC, we find that what was declared in that case was that the partners of an unregistered firm might be assessed individually or they might be assessed collectively in the status of an unregistered firm, the Income-tax Officer could not however seek to assess the one income twice once in the hands of the partners and again in the hands of the unregistered firm. On the face of it, the ratio of this decision did not at all nullify the assessment of the Respondent in the status of unregistered firm much less the very question of its genuineness, as the assessment in the cases of its partner AOPs was not made treating them to be the partners of a registered firm. We set aside this finding too recorded by the learned AAC.
34. In the final analysis, we hold that considering all the facts and circumstances of the case and on appreciation of the material on record, the conclusion is irresistible that during the years under consideration, there was no genuine firm in existence in the name of the Respondent with the constitution specified in the partnership deed dated 3-6-1980 and that the Respondent firm was an integral part and tool of the colourable scheme designed by the main members of the five families, described hereinabove, with the purpose and object to evade taxes. We accordingly set aside the order under appeal and restore that of the ITO.
35. In the result, all the appeals are allowed.
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