Commissioner of Income Tax vs Hazarimal Milapchand Surana

Y.R. Meena, J.

On an application filed u/s 256(1) of the Income Tax Act, 1961 (hereinafter referred to as ''the Act''), the Tribunal has referred the following questions for our opinion:

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that Hazari Mal Milap Chand Surana and Mannalal Nirmalkumar Surana & Co. could not in law be treated as one firm for the purposes of assessment ?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assets declared under Voluntary Disclosure Scheme, 1975 were capital assets of the assessee-firm ?

Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified in deleting the addition of Rs. 15,936 from total income of the assessee ?"

The business of the assessee-firm had commenced on 9-11-1969 and the partnership deed was executed on 11-11-1969. There were 4 partners in the firm, namely, Mannalal Surana, Nirmalkumar Surana, Vimalkumar Surana and Narendrakumar Surana. They share profits in the ratio of 10 per cent, 30 per cent, 30 per cent and 30 per cent, respectively. The business of the partnership firm was of import and export of precious and semi-precious and synthetic stones and to deal in jewellery articles and also to act as commission agents for purchase and sale of precious and semi-precious and synthetic stones and also to manufacture the precious and semi-precious stones.

The relevant assessment year is 1977-78. The assessee filed the return declaring the income at Rs. 1,23,370. By a deed of partnership dated 23-6-1976, one firm in the name and style of Mannalal Nirmalkumar Surana & Co. also came into existence. All the four partners in that firm are common as in the case of the assessee-firm, with the same profit and loss sharing ratio.

In the firm Mannalal Nirmalkumar Surana & Co., Mannalal Surana has contributed capital to the tune of Rs. 10,000, Nirmalkumar Surana has contributed capital to the tune of Rs. 15,31,000, Vimalkumar Surana has contributed capital to the tune of Rs. 15,32,000 and Narendrakumar Surana has contributed capital to the tune of Rs. 15,37,000. Nirmalkumar, Vimalkumar and Narendrakumar Surana have contributed the capital in the form of goods.

The Income Tax Officer has treated this firm Mannalal Nirmalkumar Surana & Co. as just an extension of the assessee-firm. According to him, the business of the assessee-firm and Mannalal Nirmalkumar Surana & Co. is same, partners are same, profit and loss sharing ratio is also same, therefore, the firm, Mannalal Nirmalkumar Surana & Co. is just an extension of the assessee-firm and, therefore, the income shown in the hands of Mannalal Nirmalkumar Surana & Co. has been taxed in the hands of the assessee-firm.

In appeal before the Commissioner (Appeals), the Commissioner (Appeals) considering the facts discussed by the assessing officer, had dismissed the appeal of the assessee on this ground. In appeal before the Tribunal, the Tribunal has considered the facts stated above and also the material brought on record by the assessing officer and also considered the various decisions of their Lordships and held that Mannalal Nirmalkumar Surana & Co. is not an extension of the assessee-firm and both the firms cannot be treated as one. Therefore, the Tribunal has directed that the income of Rs. 1,41,425 of the firm Mannatal Nirmalkumar Surana & Co. cannot be assessed in the hands of the assessee-firm and that should be excluded from the income of the assessee.

Mr. Singhi, the learned counsel for the revenue, submits that when the partners are common in the assessee-firm and the firm Mannalal Nirmalkumar Surana & Co., profit and loss sharing ratio is same, business is same, the place of working is same, the Tribunal has committed error in reversing the finding of the assessing officer and the Commissioner (Appeals). He further submits that firm Mannalal Nirmalkumar Surana & Co. came into existence in 1976 and was closed on 20-1-1982, just after the capital contributed was sold in the name of business of the firm of Mannalal Nirmalkumar Surana & Co.

Mr. Ranka, the learned counsel for the assessee-respondent, submits that the finding of the Income Tax Officer and the Commissioner (Appeals) is not correct to the extent that the business is same. He further clarified that the business was in the same building but in different portions of the building. He further submits that registration to the firm Mannalal Nirmalkumar Surana & Co. has been granted by the Income Tax Officer and once the registration has been granted, it cannot be said that the firm Mannalal Nirmalkumar Surana & Co. is not genuine.

He also brought to our notice that even the Tribunal has accepted finally that Mannalal Nirmalkumar Surana & Co. is genuine and the Tribunal has given direction for registration of the firm which was withdrawn by the Income Tax Officer subsequently. He also submits that the firm Mannalal Nirmalkumar Surana & Co. has its own Central Sales Tax No. and has separate bank account and registration under the Indian Partnership Act, 1932 as an independent entity. In written submission, Mr. Ranka also brought to our notice some undisputed facts on record which read as under :

There had been a partial partition of the bigger HUF and on partition Shri Nirmalkumar Surana (HUF), Shri Virnalkumar Surana (HUF) and Shri Narendrakumar Surana (HUF) received ornaments and jewellery. Out of the ornaments and jewellery so received, they wanted to carry on business contributed by way of capital and constituted new firm. The new firm carried on business. The capital did not flow from the assessee-firm;

The two partners Shri Nirmalkumar Surana and Shri Vimalkumar Surana represented their HUFs and contributed goods of the HUFs; share of profit was received by their HUFs and was assessed in the hands of their HUFs. Shri Narendrakumar Surana after marriage was assessed as HUF and earlier as an individual;

Mannalal Nirmalkumar Surana & Co. was found to be a genuine firm and was granted registration u/s 185 of the Act on 3-8-1977. Assessment of the said firm was also made;

Registration has been granted to the assessee-firm and continuation is also being granted to the assessee-firm for the year in question and all succeeding assessment years;

There is no evidence of any inter-lacing, inter-locking of funds;

The income earned by the new firm was distributed between its partners and was enjoyed by its partners;

Sales made to the assessee-firm /through the assessee-firm were at arms length, at fair market value and as per trade practice/norms and there is no iota of evidence or allegation as to over-statement or under-statement of price and diversion of income of the assessee-firm to the new firm. On the contrary, the assessee-firm earned income from the new firm which would have been earned by any other person, if the transactions would not have been through the assessee-firm;

The new firm was duly registered under the Rajasthan Sales Tax Act, Central Sales Tax Act, Indian Partnership Act and other Acts. It had separate bank account, which was operated by its partners and not by the assessee-firm. It had its own establishment;

It had maintained regular, proper and separate books of account, documents and records. It filed its returns of income on time and assessments were framed. It complied with all the requirements of the Income Tax Act and other laws.

Whether the firm Mannalal Nirmalkumar Surana & Co. is an extension of assessee-firm Hazarimal Milapchand Surana or not, that is basically a question of fact and the Tribunal has found finally that Mannalal Nirmalkumar Surana & Co. is an independent firm and not an extension of Hazarimal Milapchand Surana. That finding cannot be disturbed unless it is found that the finding of the Tribunal is perverse. There is no dispute about the facts on record that all the four partners have contributed the capital as stated above, the Sales Tax and Central Sales Tax Authorities have granted them registration No. treating them genuine, even the registration under the Act has been granted to the firm Mannalal Nirmalkumar Surana & Co. No registration can be granted unless the partnership firm is genuine. Subsequently, the registration has been withdrawn, but in that year also the Tribunal has given the direction to grant registration to firm Mannalal Nirmalkumar Surana & Co. The issue was pending before this court for our consideration. We have decided the issue in favour of the assessee.

Registration of the firm cannot be refused or the firm cannot be treated just benami of the assessee-firm only on the ground that the partners of both the firms are common and business is common. When the books are separate, partners have contributed the capital and books of account are not rejected in case of Mannalal Nirmalkumar Surana & Co., we fail to understand how the firm Mannalal Nirmalkumar Surana & Co. can be treated just an extension of assessee-firm.

Assuming for the sake of arguments that the view which has been taken by the Income Tax Officer is possible but on that basis view of the Tribunal cannot be said to be perverse, unless the view taken by the Tribunal is impossible. In absence of any material which suggests that the view taken by the Tribunal is perverse, no interference can be called for in the reference matters. In view of the aforesaid facts, we find no scope to interfere with the order of the Tribunal on this issue.

Question No. 2 relates to the issue that whether the Tribunal was right in law in holding that the assets declared under the Voluntary Disclosure Scheme, 1975 were capital assets of the assessee-firm. It appears that this question is misconceived. In para 11, the Tribunal has quoted the finding of Special Bench of Tribunal in the case of Mannalal Nirmalkumar Surana (HUF) and Mannalal Surana (individual) and Nirmalkumar Surana (individual). The relevant two paras read as under :

"The jewellery and precious stones declared by the Hindu Undivided Family of Mannalal Nirmalkumar Surana, in the voluntary disclosure were acquired and held by the Tribunal as capital assets (paragraphs 57 to 60)."

"The alleged conversion of a part of the jewellery into stock-in-trade was a mere device or presence adopted by the Hindu Undivided Family to reduce liability to tax (paragraphs 65 to 67)."

Following the view taken by the Special Bench, the issue has been decided against the assessee, that the assets in question are capital assets.

Question No. 3 relates to the issue whether the Tribunal was justified in deleting the addition of Rs. 15,936 from the total income of the assessee. The Income Tax Officer noticed that the assessee has declared Rs. 79,781 under the Voluntary Disclosure Scheme and the entry to that effect has been made in the books of account, after declaring that amount under the Voluntary Disclosure Scheme u/s 8(1) of the VDS, 1975. While making the entry in the books, assessee credited in the books of account Rs. 85,385 on revaluation of those assets. The assessing officer has observed that the assessee has not disclosed the full value of the assets under the VDS, therefore, addition of Rs. 15,050 is treated as income of the assessee for the year under assessment.

The Commissioner (Appeals) has taken the view that mere revaluation of the assets before making the entry in the books of account would not give rise to an income of the assessee. However, the Commissioner (Appeals) observed that if subsequently, the declared assets had been sold as stock-in-trade in the course of accounting year, then the question of business profit would arise and not before that. The view taken by the Commissioner (Appeals) has been confirmed by the Tribunal holding that mere revaluation of the assets does not give rise to an income or no income accrue or arose on revaluation of the assets.

We agree with the view taken by the Commissioner (Appeals) and the Tribunal that on revaluation of assets, no income accrue or arose.

In the result we answer question Nos. 1 and 3 in the affirmative, i.e., in favour of the assessee and against the revenue. Question No. 2 is misconceived as the Tribunal itself held that the assets in question are capital assets.

Reference so made stands disposed of accordingly.