1988-VIL-57-ITAT-AHM

Equivalent Citation: TTJ 034, 115,

Income Tax Appellate Tribunal AHMEDABAD

Date: 19.07.1988

INCOME TAX OFFICER.

Vs

CLOTH DISTRIBUTORS.

BENCH

Member(s)  : R. M. MEHTA., M. A. A. KHAN.

JUDGMENT

The common ground raised in all these appeals from the appellate order of the AAC dt. 13th April, 1981 reads as follows:

"The learned AAC has erred in law and on facts in holding that the registration for the asst. yrs. 1971-72 to 1977-78 were wrongly cancelled and that status quoiante is therefore to be restored. He further erred in cancelling the orders under s. 186(1) in respect of the above assessment years."

2. Since the facts involved in all the appeals are quite common these are being disposed of by this common order.

3. Briefly stated, the Relevant facts are that the assessee-respondent, a partnership firm dealing in cloth at Ahmedabad, was originally constituted under the partnership deed dt. 22nd Oct., 1969 with the following three major and two minor partners:

1. Shewcharan Purohit (34)

2. Smt. Chitradevi Kothari (24)

3. Smt. Radhabai Kothari (38)

4. Shri Rajendrakumar Purohit (Minor)

5. Shri Ishwardas Purohit (Minor)

Shri Rajendrakumar Purohit became major on 5th Aug., 1973 and elected to continue a partner in the firm. Similarly Shri Ishwardas Purohit became major on 21st April, 1976 and he too elected to continue a partner in the firm. Thus upto the year 1977-78 there had been two changes in the constitution of the firm due to the minor partners becoming major and electing to continue partners in the firm.

4. Asst. yr. 1971-72 was the first year of the business of the assessee firm. For this year on its application in Form 11 of the IT Act, 1961 (the Act), dt. 27th March, 1971 the assessee firm was granted registration under s. 185 of the Act vide the order of the ITO dt. 10th Oct., 1973. Since there was no change in the constitution of the firm for asst. yrs. 1972-73 and 1973-74 the registration granted under s. 185 on 10th Oct., 1973 was allowed to have effect for the above two years under the provisions of s. 184(7) of the Act. With Shri Rajendrakumar Purohit becoming major and electing to continue partner in the firm a fresh partnership deed dt. 5th Sept., 1973 was brought into existence and for the asst. yr. 1974-75 the change in the constitution of the firm was recognised under s. 187 of the Act and the registration was allowed to have effect under s. 184(7) of the Act for subsequent two years i.e. asst. yrs. 1975-76 and 1976-77. Similarly with Ishwardas Purohit becoming major and electing to remain partner in the firm a fresh partnership deed dt. 24th April, 1976 was brought into existence and the change in constitution was approved by the IT authorities and the assessee firm continued to have the benefit of registration.

5. It was sometimes in the month of Sept., 1978 that the Asst. Director of Inspection (Intelligence) III, Ahmedabad conducted survey operation under s. 133A at the business premises of the assessee firm at 59 Hirabhai Market, Ahmedabad. On the basis of the statement of Shri Shewcharan Purohit partner recorded on 16th Sept., 1978, 18th Sept., 1978 and 20th Sept., 1978 by the ADI (Int) III, Ahmedabad under s. 131 of the Act the ITO appears to have formed on opinion that the assessee firm was in fact a benami concern of M/s Ganesh Textiles. He therefore issued a show cause notice to the assessee firm on 30th Jan., 1979 requiring it to show cause as to why registration granted to it for the years under consideration be not cancelled for its being simply a benami concern of M/s Ganesh Textiles. By its letter dt. 8th Feb., 1979 the assessee firm not only vehemently denied its character as a benami concern of M/s Ganesh Textiles but also requested the ITO to deliver the copies of certain documents upon which he intended to rely for the purpose of cancellation of registration to it. The ITO does not appear to have proceeded further in the matter as no document speaking about the action of the ITO in that direction has been placed before us.

6. It appears that on 2nd March, 1980 the ITO summoned Smt. Radhabai Kothari, partner and examined under s. 131 of the Act. In answer to certain questions put by the ITO to the said lady partner she appears to have stated that though Shri Shewcharan Purohit was looking after the business of the assessee firm yet he himself was not a partner in the said firm. She further appears to have stated that she had become partner in the assessee firm at the instance of her late husband. The ITO, on the basis of such answers of Smt. Radhabai Kothari, formed an opinion that the assessee firm was inherently a non-genuine firm in as much a that the relationship agency did not exist in between Smt. Radhabai Kothari on the one hand and Shri Shewcharan Purohit on the other. He was further of the opinion that Smt. Radhabai Kothari had not become partner on her own free will but had joined the firm as a partner at the instance of her late husband. In his opinion both the two points affected the very character of the assessee firm as a genuine partnership firm and therefore registration granted to it for all the seven years under consideration was required to be cancelled. He therefore, by his letter dt. 3rd March, 1980 required the assessee firm to show cause as to why registration granted to it for asst. yrs. 1971-72 to 1976-77 be not cancelled. Though by its letter dt. 14th March, 1980 and 19th March, 1980 the assessee firm not only fully explained its constitution and the infirmity in the statement of Smt. Radhabai Kothari as had been pointed out by the ITO but also requested the ITO to allow it an opportunity to cross examine Smt. Radhabai Kothari upon whose evidence the ITO intended to rely to the disadvantage of the assessee firm yet the ITO did neither accept the explanation offered by the assessee firm nor did he accede to its prayer to allow cross examination on Smt. Radhabai Kothari by it. He therefore held that no valid contract of partnership existed between Smt. Radhabai Kothari and Shri Shewcharan and therefore there was no genuine firm in existence during the previous years Relevant to the asst. yr. 1971-72 (both inclusive) with the constitution as specified in the instruments of partnership dt. 22nd Oct., 1970 and 5th March, 1973. He accordingly cancelled the registration granted to the assessee firm the assessment years under consideration after obtaining the previous approval of the IAC, Ahemdabad Range-IV, Ahmedabad. The assessee firm carried the matter in appeal to the AAC.

7. The AAC examined the matter quite exhaustively and come to hold the opinion that the ITO had taken recourse to a patently illegal course of action by denying the opportunity of cross examination on Smt. Radhabai Kothari to the assessee and had also failed to take a judicious and balanced view of the matter. The learned AAC particularly observed that the ITO had not placed on record the material furnished to him by the ADI which initially impelled to record the statement of Smt. Radhabai Kothari and Smt. Chitradevi. Further the ITO had failed to point out any other evidence or cogent material from which it could be reasonably concluded that there was no genuine partnership. The learned AAC further observed that the ITO had read much more into the statement of Smt. Radhabai Kothari than want the circumstances of the case merited. The learned AAC, after critically examining the statement of Smt. Radhabai Kothari came to the conclusion that the ITO should not have made only a part of the statement of that lady the basis of cancellation of registration for several years in the present case. He therefore set aside the order of the ITO thus giving thereby rise to these appeals before us.

8. Mr. R.P. Bhatt, the learned standing counsel for the Department no doubt argued with much industry that the ITO was justified in cancelling the registration granted to the assessee firm for the years under consideration on the strength of the statement of Smt. Radhabai Kothari in which she had denied that Shri Shewcharan was a partner in the firm. Mr. Bhatt took us through the order passed by the ITO in these cases and stressed that in answer to question No. 5 to 10 Smt. Radhabai Kothari could not definitely say that Shri Shewcharan was also a partner in the assessee firm and therefore in view of such statement of that lady partner the ITO could have inferred that there was absence of relationship of agency between Smt. Radhabai Kothari and Shri Shewcharan Purohit. Mr. Bhatt thus submitted that the learned AAC should not have upset the order of the ITO and requested us to restore the order of cancellation of registration. Contrary to it Mr. K.C. Patel the learned counsel for the assessee firm not only took us through the order of the AAC but also through several letters written by the assessee firm to the ITO and vehemently submitted that it should not be lost sight of that the assessee firm had been granted registration after necessary query in the asst. yr. 1971-72. Mr. Patel further submitted that thereafter there had been changes in the constitution of the assessee firm for two times i.e. in 1973 and 1976 but at none of the occasions the Department had doubted the genuineness of the assessee firm as partnership business. Mr. Patel further submitted that the distribution of shares of profit and losses amongst its various partners was never doubted by the Department even at the time of granting renewal of registration. The learned counsel stressed that by the conduct of the Partners of the assessee firm as also of the officers of the Department it was crystal clear that the existence of the relationship of agency amongst the partners interest and vis-a-vis the firm was never doubted. Mr. Patel particularly pointed out that the survey operation had been carried out sometimes in the month of Sept., 1978 and at time Shri Shewcharan Purohit, partner had been cross examined by the ADI. It was on the basis of the statement of Shri Shewcharan Purohit that the ITO had proposed to cancel registration on the ground that the assessee firm was simply a benami concern of M/s Ganesh Textiles. But that ground had to be disowned by the Department on reconsideration. Mr. Patel then pointed out that it took almost a year or so to the Department to have changed its stand in the direction of cancellation of registration to the assessee firm and Smt. Radhabai Kothari was called for cross examination on 2nd March, 1979. Mr. Patel stressed that Smt. Radhabai Kothari was an old marwadi lady who was not only illiterate or semi illiterate but was also a widow. Moreover she had specifically stated that the day to day business of the firm was being looked after by Shewcharan Purohit though at the same time she had also stated that the brothers of Shri Shewcharan Purohit and not Shri Sheweharan Purohit himself was a partner in the assessee firm. Mr. Patel submitted that the statement of the witness was required to be read as a whole and not in piece meal. The learned counsel invited our attention to the order under appeal wherein the learned AAC has dealt with the testimony of Smt. Radhabai Kothari and has concluded that on the basis of her statement it would be totally unwise to cancel the registration granted to the assessee firm during the last about seven or eight years. Mr. Patel finally submitted that the learned AAC in the present cases has simply corrected the mistake committed by the ITO and his judicious order does not require to be again turned into an injudicious order. In support of his arguments Mr. Patel heavily relied upon the ratio in the decision of the Supreme Court in the case of CIT, Gujarat vs. A. Abdul Rahim & Co. (1965) 55 ITR 651 (SC), of the Madras High Court in the case of A.M. Abdul Rahman Rathod & Co. vs. CIT, Madras (1965) 56 ITR 556 (Mad), of the M.P. High Court in the case of United Patel Construction Co. vs. CIT (1966) 59 ITR 424 (MP) of Madras High Court in the case of S.S.A. Ganga Mirthamal & Co. vs. CIT, Madras (1969) 74 ITR 473 (Mad) and of Allahabad High Court in the case of Chitra Cinema vs. CIT (1972) 86 ITR 203 (All).

9. We have given our due consideration to the rival submission made on behalf of the parties before us and have gone through the record as placed before us. We have particularly and closely studied the statement of Smt. Radhabai Kothari dt. 2nd March, 1979. After having studied the point involved in these appeals quite patiently we have been clearly of the opinion that there was absolutely no justification on the part of the ITO to have invoked his jurisdiction under s. 186(1) of the Act in the present cases. We find all the appeals totally devoid of any force and would like to dismiss them outright.

10. Sec. 186(1) of the Act undoubtedly confers a discretionary jurisdiction upon an ITO to cancel the registration of a firm for an assessment year if he is of the opinion that there was, during the previous year, no genuine firm in existence as registered. But the discretionary jurisdiction vested in the ITO is to be exercised judicially and judiciously and not arbitrarily. The ITO has al the jurisdiction to enquire whether an instrument of partnership is intended by the parties to be really effective as governing their rights and liabilities interest in relation to the partnership business or whether it is only a pretence to escape liability for tax. In fact the IT Department has a duty to scrutinise the matter and to satisfy itself that the firm has been genuinely constituted but the conclusion that partnership firm is not genuine is not to be founded on a suspicion. It would not be proper on the part of the Department to display undue suspicion in the matter and suspect every partnership as devise to escape tax particularly a partnership to which not only registration had been granted long back but such registration has been renewed by the Department from time to time. It is thus obvious that the jurisdiction vested in the ITO under s. 186(1) of the IT Act is to be exercised on sound footings and not merely on suspicion and surmises. In the instant case, we have no hesitation to say that the ITO had proceeded to exercise his jurisdiction not only quite arbitrarily and injudiciously but also on mere suspicion and surmises and his important act has rightly been corrected by the learned AAC.

11. From the facts narrated above it is clearly gathered that the action of the ITO in the present matter was founded on his reading the statement of Smt. Radhabai Kothari in his own way and to the prejudice of the assessee firm. Before we come to appreciate the statement of Smt. Radhabai Kothari we would like to point out that the action by the ADI III, Ahmedabad under s. 133A had in fact laid the foundation for the action by the ITO under s. 186(1) at a later stage. As has been stated by us above the ADI (Int) had examined Shri Shewcharan Purohit, partner under s. 131 and wherein Shri Sheweharan Purohit had categorically stated that he was a partner in the assessee firm as well as in another partnership firm M/s Ganesh Textiles. From such statement of Shri Sheweharan Purohit partner the ITO had taken the clue for his opinion that the assessee firm was simply a benami firm of M/s Ganesh Textiles and that is why by his letter dt. 30th Jan., 1979 he had proposed to cancel the registration of the assessee firm on that ground. Perhaps the ITO could not find sound foundation for his said view and therefore he did not proceed to cancel the registration on the grounds mentioned by him in his letter dt. 30th Jan., 1979. It was after the lapse of about a year or so that he thought it proper to summon Smt. Radhabai Kothari and to examine her on the point. Curiously enough the ITO did not consider to summon the male partner of the firm for the purpose. Again he did not consider it proper to summon another female partner of the firm who was Smt. Chitradevi Kothari. As is gathered from the statement of Smt. Radhabai Kothari she was put as many as 22 questions and we agree with the observations of the learned AAC that in answer to most of the questions Smt. Radhabai Kothari had stood the test of cross examination. It is no doubt true that in answer to question No. 10 she had stated that Shri Shewcharan Purohit was not a partner in the assessee firm. It was this answer of the lady that led the ITO to conclude that the assessee firm was not a genuine partnership firm and therefore registration granted to it under s. 185 on 10th Oct., 1973 or allowed to have effect under s. 184(7) in subsequent years be cancelled. We disapprove the approach adopted by the ITO in reading the statement of Smt. Radhabai Kothari. Thus a bare look at the partnership deed dt. 22nd Oct., 1970 would have informed the ITO that there were two families, one a Purohit family and the other a Kothari family which had agreed to carry on business in cloth and to share the profits and losses of the business equally. Smt. Radhabai Kothari and Smt. Chitradevi Kothari came from Kothari family having 50 per cent share in the profit and losses of the partnership business. From the Purohit family there were three members viz. Shewcharan Purohit, Rajendrakumar Purohit and Ishwardas Purohit. Of the Purohit family only Shewcharan Purohit was major and undisputedly he was the person looking after the affairs of the business. Rajendrakumar Purohit and Ishwardas Purohit were minors and the rest of the two partners were homely ladies and therefore it was Shewcharan Purohit alone who could have looked after the affairs of the partnership business. In her statement Smt. Radhabai Kothari had clearly stated that she and Chitradevi were together partners in the partnership firm to the extent of 50 per cent shares and the rest of the 50 per cent belonged to the Purohit brothers. Again it was an obvious fact that both Smt. Chitradevi Kothari and Radhabai Kothari came from orthodox and conservative family and were illiterate. Smt. Radhabai Kothari was not actively looking after the day to day business of the partnership firm nor could she had done that. From her statement even it could have been clearly gathered, and she had also stated to that effect in no uncertain terms that it was Shri Shewcharan who was the main figure in the conduct of the business of the firm. She had nowhere stated that Shri Shewcharan Purohit was a paid employee of the firm or of any of the partners of the firm. Thus the very statement of Smt. Radhabai Kothari clearly indicated that Shri Shewcharan Purohit was in fact a partner in the firm.

12. It is well settled principle of appreciating the testimony of a witness that his statement should be read as a whole. It is after reading the statement of a witness as a whole that opinion about his creditworthiness and truthfulness can be formed. The learned AAC has pointed out to certain other questions and answers in the statement of Smt. Radhabai Kothari and has concluded that her statement does not suggest that Shri Shewcharan Purohit was not a partner in the assessee firm. We agree with the conclusion arrived at by the learned AAC in this behalf. We may further point out that not only the partnership deed mentions the fact that Shri Shewcharan was a partner in the firm but that fact has also clearly been stated by Shri Shewcharan Purohit himself in his statement dt. 16th Sept., 1978 recorded under s. 131 by ADI and by Smt. Chitradevi Kothari in her statement dt. 6th March, 1979. The ITO very conveniently ignored the document of partnership as also the statement of two other partners on the point. He also ignored that it was after enquiry into the genuineness of the firm that registration to it had been granted in the year 1973 and such registration had been allowed to have the effect under s. 184(7) for subsequent years. He had further ignored the fact that as and when there was a change in the constitution of the firm the document of partnership was signed by all partners including Shri Shewcharan and Smt. Radhabai Kothari. In our opinion the ITO should have kept it in mind that the illiterate or semi-illiterate ladies coming from orthodox and conservative families do not generally actively participate in the conduct of a family or partnership business. They might be partners in the partnership businesses but that fact itself would not suggest that they might also be having all the knowledge about all the partners in such business and their activities. The concept of the sleeping partners has judicial recognition and the ITO should have considered twice before cancelling the registration in the present case that Smt. Radhabai Kothari had not categorically asserted that she herself was looking after the affairs of the business of the firm or a person other than Shri Shewcharan Purohit was conducting the business of the firm. All the circumstances taken together were sufficient to inform the ITO that his view about the non-genuine character of the assessee firm was not well founded.

13. Before we part with the present cases we would also like to point out that the statement of Smt. Radhabai Kothari could not have been read at all by the ITO against the assessee firm in the fact and circumstance of the present case. It is the fundamental principle governing all judicial proceedings including those under the Act that a person should be given an opportunity to meet the evidence which is intended to be used by his adversary against him. It is a valuable right of an assessee to ask the ITO to tell him as to what evidence does he intend to use against him and further to ask the ITO to allow him an opportunity to meet such evidence either by the exercise of his right to cross examine the witness, if the evidence intended to be relied upon by the ITO consists of the statement of a witness or to produce evidence in rebuttal if the evidence to be relied upon by the ITO against him consists of some documents. In the present case we are pained to see that by its reply dt. 19th March, 1980 the assessee firm had specifically asked the ITO to furnish it the copies of such documents, particularly the statement of Smt. Radhabai Kothari upon which he intended to rely against the assessee firm. We agree with the learned AAC that the action of the ITO in refusing to deliver the copy of the statement of Smt. Radhabai Kothari dt. 2nd March, 1979 to the assessee firm even at its request was most unjudicious and quite arbitrary. Once the ITO intended to use the piece of evidence against an assessee which was collected in the absence of the assessee it was obligatory on the part of the ITO not only to have furnished a copy of such evidence to the assessee but also to allow him an opportunity to produce evidence in rebuttal to it or to cross examine the witness, if such evidence consisted of the oral testimony of a person. If the assessee has been unjustly denied an opportunity to cross examine a witness on whose testimony the ITO intended to rely against the assessee, such an evidence cannot be read against the assessee.

14. To sum-up we are clearly of the opinion that the ITO was not at all justified in cancelling the registration to the assessee firm for any of the year under consideration and the learned AAC had very rightly corrected the mistake committed by the ITO in cancelling such registration to the assessee firm in several years. We must state that our conclusions find good support from the cases relied upon by Mr. Patel which we do not intend to deal with for the obvious reason that the facts involved in the present cases are quite clear and need no help from the principles enunciated in the cited cases for their approval by us. At the most we can, with the help of the authorities relied upon, observe that in the present cases it was highly uncharitable on the part of the ITO to characterise the assessee firm as non-genuine when all the facts and circumstances of the case, as pointed out by us above clearly indicated that Shri Shewcharan Purohit was in fact an active partner in the assessee firm and the relationship of agency existed between him vis-a-vis all the other partners of the firm including Smt. Radhabai Kothari, whose casual statement that Shri Shewcharan Purohit was not a partner was not to be given much importance for the reasons mentioned above by us and in the ratio of the decision of the M.P. High Court in the case of United Patel Construction. We thus find no force in these appeals and dismiss them as such.

15. In the result, all the appeals are dismissed.

 

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