Ishwarlal and Brothers vs Commissioner of Income Tax

A.M. Ahmadi, J.—The two questions, namely: 1. Whether the conclusion of the Bangalore Bench to the effect that the Bangalore firm was not a genuine firm necessarily leads to the conclusion that it was a branch of the Surat firm?

Whether the assessment of the Bangalore firm as an unregistered firm would affect its being considered a branch of the Surat firm?

Have been referred for the opinion of this Court. They arise under the following circumstances:

The assessment years under reference are from 1966-67 to 1969-70. The assessee Ishwar lal & Brothers is a registered partnership firm carrying on business of manufacture and sale of real and limitation Jari Kasab. Its partners are four brothers, namely, Jamnadas Moolchanddas, Nagindas Moolchanddas, Jaikishandas Moolchanddas and Shagwandas Moolchanddas. Each partner has 25 per cent share in the profits and losses of the partnership firm. The assessee firm had a branch at Bangalore till 23-10-1957 (end of Samvat Year 2013). It is the case of the assessee that it wound up its business so far as the Bangalore branch is concerned with effect from 23-10-1957 and thereafter an independent firm styled as Ishwarlal & Company came into existence with effect from 24-10-1957. This independent firm consisted of two sons of Nagindas, namely, Ramanlal and Ratilal each of whom had 271/2 per cent share in the profits and losses of the partnership. Three minors, namely, Nerendra Jamnadas, Arvind Bhagwandas and Ishwarlal Kishandas were admitted to the benefits of the partnership and each was given a share of 15 per cent in the profits of the partnership. It thus appears that in the new and independent firm, which is stated to have taken over its business in Bangalore with effect from 24-10-1957, two sons of Nagindas who were major at the date of the creation of the new partnership and one minor son of each of the remaining three partners of the Surat firm, namely, Jamnadas, Bhagwandas and Jaikishandas, were admitted to the benefits of the new partnership. In other words, according to the revenue, all the four partners of the firm having its head office at Surat have an interest through their respective sons in the newly created partnership which is said to be carrying on business in Bangalore with effect from 24-10-1957. For the sake of convenience we will refer to this newly created firm as the Bangalore firm and the old firm having its Head Office at Surat as the Surat firm. 2. The Bangalore firm applied to the ITO, Bangalore, for its registration on 7-6-1958. The ITO rejected the said application on two grounds, namely: (i) that the capital of the firm was contributed by the minors only; and (ii) that in a letter written to the Central Bank of India. Jamnadas, Moolchanddas and Ramanlal Nagindas were described as partners of the firm. On the same ground registration for the subsequent years was also refused. The Bangalore firm preferred appeals to the AAC feeling aggrieved by the order passed by the ITO, Bangalore. It was submitted before the AAC that the fact that the major partners of the firm, namely, Ramanlal Nagindas and Ratilal Nagindas, had not contributed towards the capital of the firm did not justify refusal to register the firm and that Jamnadas Moolchanddas, being the father of minor Narendra Jamnadas who had a 15 per cent interest in the benefits of the Bangalore firm, was authorised to operate the bank accounts of the firm which was permissible in law. Both these submissions did not find favour with the AAC who rejected the appeals preferred by the Bangalore firm and confirmed the order of the ITO, Bangalore. Further appeals were, therefore, carried to the Tribunal, Madras Bench, (''the Madras Tribunal'') which held that it was not necessary in law that capital should be contributed by all the partners and the failure on the part of the major partners to contribute towards the capital would not impugned upon their right to have the firm registered. It, however, felt that the second ground on which registration was refused was quite tenable on facts and in law. The Tribunal came to the conclusion that the application made to the Central Bank of India, Bangalore, wherein Jamnadas Moolchanddas is shown to be a partner of the firm along with Ramanlal Nagindas, and, the absence of the name of Ratilal Nagindas as the partner of the Bangalore firm is a clear indication that the firm is not genuine. The Tribunal did not accept the explanation that Jamnadas Moolchanddas was specially authorised to operate the bank accounts since no such authority appeared from the terms of the partnership deed. Besides, it was observed that if Jamnadas was operating under any such authority, he would have been described as a person having authority to operate the bank account or in any other manner to suggest the same but not as a partner along with Ramanlal dropping the name of Ratilal. In that view that it took, the Tribunal held that ''the old branch of the Surat firm is continued under the guise of an independent firm''. The appeals were, therefore, dismissed. The Bangalore firm, therefore sought a reference u/s 66(1) of the Indian income tax Act, 1922 (''the 1922 Act''). The question which the Mysore High Court at Bangalore was required to consider was: "Whether, there was evidence on which it was open to the income tax authority to come to a decision that the firm of Ishwarlal & Co., as constituted under the partnership deed dated 24-10-1957 did not exist?" At the hearing of the said reference the learned counsel for the revenue conceded that the finding recorded by the Tribunal that the old branch of the Surat firm was being continued in the guise of an independent firm was not based on any evidence and the same is to be ignored. The High Court found that the finding of the Tribunal that the old branch of the Surat firm was being continued in the guise of a new firm is inconsistent with the action of the ITO who assessed the assessee in the status of an unregistered firm apportioning the tax amongst the several partners of the Bangalore firm in the manner provided under the deed of partnership. Their Lordships observed that if the assessee were in fact a branch of the Surat firm, the income of the assessee should have been treated as income of the Surat firm and assessed accordingly. There was no finding by the Tribunal that the partners of the Bangalore firm were benamidars or the partners of the Surat firm. Taking the view that the ultimate finding recorded by the Tribunal regarding the genuineness and existence of the Bangalore firm was influenced by the finding that the old branch of the Surat firm was carrying on business in the guise of a new and independent firm vitiated the conclusion reached by the Tribunal, without answering the question, the High Court sent back the matter to the Tribunal for a fresh hearing of the appeals after giving a fresh opportunity to the parties to be heard in the light of the observations made by the High Court for a finding on the question of genuineness and existence of the Bangalore firm. It appears that in the meantime the ITO, Surat, relying on the decision of the Madras Tribunal unaware of the judgment delivered by the High Court proceeded to tax the Surat firm on the basis that the income of the Bangalore firm was liable to be clubbed with the income of the Surat firm. This order was passed on 29-3-1971. He also made certain consequential orders. The Surat firm feeling aggrieved by the view taken by the ITO, Surat carried the matter in appeal to the AAC who reversed the decision of the ITO in this behalf. The revenue, therefore, carried the matter in appeal to the Tribunal, Ahmedabad Bench, (''the Ahmedabad Tribunal''). In the meantime, on the basis of the remand order made by the Mysore High Court at Bangalore, the Tribunal, Bangalore Bench (''the Bangalore Tribunal'') came to the conclusion that the Bangalore firm was not a genuine firm and did not exist as evidenced by the partnership deed dated 24-10-1957. The reasons which prevailed with the Bangalore Tribunal have been reproduced in extenso in paragraph 14 of the Tribunal''s order. Those reasons show the foundation laid by the revenue before the Bangalore Tribunal, in support of its contention that the Bangalore firm was not a genuine firm and did not really exist was accepted. It transpires from the reasons which have been set out in Tribunal''s order that Ramanlal Nagindas when asked had stated that he was unaware of the extent of his share in the partnership because his uncle Jamnadas was carrying on the business at Bangalore. This statement which is found in the extracted portion from the judgment of the Bangalore Tribunal shows that it was Ramanlal Nagindas, the partner of the Bangalore firm who had appeared before the taxation authorities and had stated that Jamnadas was managing the affairs of the business carried on by the Bangalore firm. Having regard to the various circumstances placed on record which have been dealt with in the extracted portion from the order of the Bangalore Tribunal it was held that the Bangalore firm was not genuine and had no existence whatsoever. The Ahmedabad Tribunal relying on the facts which were laid in the proceedings concerning the Bangalore firm reproduced in their order, ultimately came to the conclusion that the income earned by the Bangalore firm which was held to be non est must be assessed and taxed as the income of the Surat firm because the status quo ante must be taken to be established as a mere corollary to the finding that the Bangalore firm was not a genuine firm and did not have any existence. The Tribunal, therefore, concluded that the decision of the ITO to include the income of the Bangalore firm as income in the hands of the Surat firm was correct. The Tribunal, therefore, allowed the appeal reversing the decision of the AAC. On the restoration of the order of the ITO, the assessee (Surat firm) felt aggrieved and sought a reference under sub-section (2) of section 256 of the income tax Act, 1961 (''the Act'').

At the outset, it must be pointed out that immediately after the cessation of business at Bangalore by the Surat firm and the creation of an independent firm with effect from 24-10-1957 in the assessment proceedings of the Surat firm for the assessment year 1959-60 the ITO considered the question whether the Bangalore firm was a Bench of the Surat firm. In order to satisfy the ITO that the Bangalore firm had an independent existence, the Surat firm produced copies of the orders made by the tax authorities concerning the Bangalore firm. All the relevant orders were obtained and laid before the income tax authority at Surat in order to enable it to decide whether the Bangalore firm had an independent existence. The assessment of the Surat firm was completed on 23-3-1964 on the basis that the Bangalore firm was not a branch of the Surat firm. Similarly, for the assessment years 1960-61 and 1961-62, the assessment of the Surat firm was made on the basis that the Bangalore firm was not a branch of the Surat firm. Thereafter, on 11-3-1968 the ITO at Bangalore issued notices u/s 148 of the 1961 Act to the Surat firm proposing reassessment for the years 1959-60 and 1960-61 on the ground that the Bangalore firm was a branch of the Surat firm. The proceedings arising out of the said notice ultimately reached the High Court and the proposed action of the revenue was held to be without jurisdiction - Ishverlal and Bros. Vs. N.N. Seth, Income Tax Officer, Surat, . Mr. J.P. Shah, the learned counsel for the assessee, pointed out from this judgment that the question whether the Bangalore firm was a branch of the Surat firm even after 24-10-1957 was settled after reference to the Commissioner who had the benefit of going through all the relevant orders passed by the tax authorities concerning the Bangalore firm. This clearly emerges from the following paragraph of the judgment:

... It appears that finally on 18th February, 1964, the Commissioner of income tax wrote to the petitioner-firm that the matter in controversy was discussed by the petitioner''s representatives with the Commissioner and thereupon necessary instructions were issued by the Commissioner to the concerned income tax Officer. It is an admitted fact that thereafter the assessment of the petitioner''s income for the assessment year 1959-60 was completed on March 23, 1964, on the basis that the income earned by the Bangalore firm was an income earned by a separate and independent entity and should, therefore, not be clubbed with the income earned by the assessee..." (p. 417)

Thereafter the assessment was made on the same basis up to the assessment year 1965-66. It would thus appear from these facts that right from 1959-60 to 1965-66 the Surat firm was assessed on the basis that the Bangalore firm was not its branch.

Mr. J.P. Shah, the learned counsel for the assessee, contended that the ITO, Surat, had relied on the decision of the Madras Tribunal, which held that the Bangalore firm did not have any independent existence but was being carried on by the Surat firm in the guise of an independent firm. It was this finding of fact recorded by the said Tribunal which formed the basis for the view taken by the ITO, Surat. The decision of the ITO was rendered on 29-3-1971, that is almost one and half years after the decision of the Mysore High Court in IT Reference No. 30 of 1967. As pointed out earlier, even the learned counsel for the revenue had to concede before the High Court that the ground given by the Tribunal that the old branch of the Surat firm was being contended in the guise of an independent firm was based on no evidence and must be ignored. The High Court also came to an independent conclusion that the said view expressed by the Tribunal could not be sustained for the additional reason that it was inconsistent with the action of the ITO who assessed the Bangalore firm as an unregistered firm apportioning the tax amongst the several partners in the manner provided under the partnership deed. It set aside the order of the Tribunal as it felt that the finding that the new firm did not really exist was considerably influenced by the inference drawn by the Tribunal that the old branch of the Surat firm was carrying on business at Bangalore in the guise of an independent firm. Therefore, on the date on which the ITO made the order which has given rise to this reference, the very basis of the order was wiped out by the judgment of the Mysore High Court, copy whereof was made available to us by Mr. J.P. Shah. The AAC took note of the High Court judgment and ultimately reversed the decision of the ITO. When the matter reached the Tribunal, the Bangalore Tribunal had on remand held that the Bangalore firm was not genuine and did not exist and had refused registration on that ground by its order dated 1-1-1974. That order was available to the Ahmedabad Tribunal when it disposed of the assessee''s appeals which have given rise to the present reference. The Tribunal took the view that since the Bangalore Tribunal had held that the Bangalore firm was not genuine and did not exist for the purpose of refusing registration, it followed as a consequence that the status qua ante was restored and, therefore, the Bangalore firm ought to be treated as a branch of the Surat firm. It was on this premise that the Tribunal upheld the order of the ITO and reversed the order of the AAC.

Mr. J.P. Shah, the learned counsel for the assessee, pointed out that the revenue had failed to lay facts in the proceedings commenced by the ITO, Surat, to prove that the Bangalore firm was a branch of the Surat firm. He pointed out and, in our opinion, rightly, that the observations reproduced from the order of the Bangalore Tribunal would only go to show what foundation was laid by the revenue in the proceedings concerning the Bangalore firm but those facts could not be read as established facts so far as the proceedings initiated by the ITO, Surat, is concerned. That is because the assessee-firm was not a party to the proceedings before the tax authorities at Bangalore. There is nothing on record to show that any of the partners of the assessee-firm had been served with a notice to show cause why the Bangalore firm should be held to be a branch of the Surat firm. Precisely, the same was the objection in the first round which ended with the judgment of the Mysore High Court observing that the finding recorded by the Madras Tribunal to the effect that the Bangalore firm was a branch of the Surat firm was without jurisdiction inasmuch as the Tribunal was merely concerned to decide whether the Bangalore firm was genuine and had independent existence for the limited purpose of either granting or refusing registration under the provisions of the 1961 Act. It was not concerned to decide whether the Bangalore firm was a branch of the Surat firm. That is why in the subsequent round the Bangalore Tribunal by its order dated 1-1-1974 refused registration on the ground that the Bangalore firm was not genuine and did not exist. It, however, proceeded to tax the partners of the Bangalore firm according to their shares in the partnership deed on 24-10-1957 by which the independent firm was born. Therefore, J.P. Shah rightly emphasised that since none of the partners of the Surat firm was a party to the proceedings before the tax authorities at Bangalore, the conclusions of fact recorded by the Bangalore Tribunal could not be used against the assessee as if those facts were laid before the ITO, Surat. If such a procedure is followed as has been followed by the Tribunal, we are afraid that without giving an opportunity to the assessee to disprove the said facts, the facts would be used against the assessee as established and the conclusion based thereon would clearly be vitiated for the simple reason that the rule of natural justice stood violated. In the present case what the Ahmedabad Tribunal has done is to reproduce the facts which were found established by the Bangalore Tribunal and has utilised those facts without giving the assessee an opportunity to dispute or disprove them as if they were established and proved before the ITO, Surat. It is on this premise that the Ahmedabad Tribunal came to the conclusion that the Bangalore firm was a branch of the Surat firm. The Tribunal does not appear to have taken into consideration the fact that the Surat firm was being assessed as an independent firm (without a branch at Bangalore) from the assessment year 1959-60 to the assessment year 1965-66 after the Commissioner bad taken a decision that the Bangalore firm was not a branch of the Surat firm. We are not suggesting that the decision is final but that is also a circumstance which must be taken into consideration. It is also not known whether the assessment made by the tax authorities at Bangalore insofar as the Bangalore firm is concerned is final and if so the Tribunal has failed to take into account the effect thereof. It, therefore, appears to us that from the mere fact that the Bangalore Tribunal refused registration to the Bangalore firm on the ground that it is not genuine and does not exist, the Ahmedabad Tribunal has jumped to the conclusion that the Bangalore firm is an appendage of the Surat firm. In our opinion, it was not possible for the Tribunal to come to a finding of fact that the Bangalore firm was a branch of the Surat firm in the absence of facts laid before it by the revenue. As stated earlier, the facts which were laid before the Bangalore Tribunal could not be used against the assessee because it does not appear from the record that any of the partners of the Surat firm was a party to the proceedings before the tax authorities at Bangalore. Therefore, the facts found by the Bangalore Tribunal could not be used against the assessee because to do so would be to violate the principle of natural justice.

It appears to us that the ITO, Surat, did not consider it necessary to lay on record the necessary foundation for coming to the conclusion that the Bangalore firm was a branch of the Surat firm because he relied on the findings of fact recorded by the Madras Tribunal to the effect that the old branch of the Surat firm at Bangalore was being continued disguised as a new firm. That was because the ITO, Surat, was not aware of the fact that the Mysore High Court had disapproved these observations and had remanded back the matter to the Tribunal for deciding the limited question whether the Bangalore firm should be granted or refused registration under the provisions of the Act. The Ahmedabad Tribunal acted on the basis of the facts found by the Bangalore Tribunal which have been reproduced in its order without directing the authorities below to lay the foundation in view of the fact that the decision of the Madras Tribunal was reversed by the High Court. The resultant situation is that except the bare fact that registration to the Bangalore firm was refused, there exist no circumstances on the record of the case to conclude that the Bangalore firm is a branch of the Surat firm. In the absence of the relevant fact situation we have no alternative but to resort to the procedure which was followed by the Supreme Court in COMMISSIONER OF Income Tax, WEST BENGAL I Vs. INDIAN MOLASSES CO. P. LTD., . Under the circumstances, we are unable to answer the questions referred to us for our opinion and, therefore, direct that the matter should go back to the Tribunal which may take necessary action in accordance with law so that the relevant facts required for reaching the conclusion that the Bangalore firm is a branch of the Surat firm can be laid by the revenue and a decision on proved and established facts can be reached. For that purpose if the Tribunal considers it necessary, it may remand the matter to the ITO for laying the foundation in support of the revenue''s contention that the Bangalore firm is a branch of the Surat firm.

It was submitted by Mr. J.P. Shah, the learned counsel for the assessee, that the assessment orders made in regard to the Bangalore firm have become final and the tax has been recovered from the partners of the said firm in pursuance of the said orders. He submitted that should the revenue succeed in proving that the Bangalore firm is a branch of the Surat firm, the revenue will be recovering tax twice over because it has already recover ed the tax from the Bangalore firm and would then proceed to recover the tax from the Surat firm since the income of the Bangalore branch has already been added as income of the assessee-firm on protective basis. In order to allay this fear, Mr. S.N. Shelat, the learned counsel for the revenue, has placed on record the following statement:

Taxes paid by the Bangalore firm in the status of URF for the assessment years 1966-67 to 1969-70 will be given credit, in case the income of the Bangalore firm is added as income of a branch in the hands of Ishverlal and Brothers of Surat. For the purpose of any interest or penalty the Surat firm shall be deemed to have paid the taxes on the date of payment by the Bangalore firm.

This statement made by Mr. Shelat, is sufficient to allay the fear of Mr. J.P. Shah, the learned advocate for the assessee. In view of the above, the reference is disposed of accordingly with no order as to costs.