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Citation Codes
Equivalent Citations
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Case Number
Judges
  • Ajit K. Sengupta
  • Bhagabati Prasad Banerjee, JJ.
Acts
  • section 256(2) of the Income-tax Act, 1961:1.
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • Ajit K. Sengupta
  • Bhagabati Prasad Banerjee, JJ.
Acts
  • section 256(2) of the Income-tax Act, 1961:1.
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Smart Summary

Judgment Summary

Factual and Procedural Background

The assessee is a Hindu undivided family (HUF) carrying on business with head office in Calcutta and a branch office at Varanasi. The HUF consisted, inter alia, of Sri Satyanarain Prasad (karta), his wife Smt. Savitri Debi, and his son Sri Deepak Prakash. Smt. Savitri Debi and Sri Deepak Prakash were partners in a firm called Messrs. J.S. Distributors formed by a partnership deed dated 7 July 1959. On 15 January 1960 the HUF entered into an agreement with J.S. Distributors under which the firm agreed to execute the HUF's business for a commission of two per cent of gross sales.

For assessment years 1963–64, 1964–65 and 1965–66 (accounting years ending Diwali 1962–1964), the Income-tax Officer (ITO) included the entire income of J.S. Distributors in the total income of the HUF on the view that the partnership was not genuine and that the business was really conducted by the HUF. The Appellate Assistant Commissioner (AAC) deleted that addition after having earlier held in proceedings concerning the firm that J.S. Distributors was a genuine firm and its business was its own. The Revenue appealed to the Tribunal, which (in a consolidated order dated 21 September 1973) upheld the AAC's finding of genuineness in the registration appeals but, in the present appeals, entertained an alternative contention of the Revenue and held that 52 per cent of the business profits of J.S. Distributors should be added to the HUF's income on the basis that the wife and son of the karta were really representing the HUF.

The HUF (assessee) sought references under section 256(2) of the Income-tax Act, 1961 presenting two questions of law for the years 1963–64 to 1965–66. The High Court heard the reference.

Legal Issues Presented

  1. Whether the Tribunal was justified in law in admitting a new ground for the first time before the Tribunal, namely, the question of benami with regard to the share income of Smt. Savitri Debi and Deepak Prakash?
  2. Whether the Tribunal's finding that the wife and son of Sri Satyanarain Prasad were really representing the Hindu undivided family and that 52 per cent of the business profits of Messrs. J.S. Distributors was to be added to the income of the assessee is based on any evidence and/or material and/or partly on irrelevant materials and partly on its failure to consider the relevant materials and/or based on mere conjecture or surmise and perverse?

Arguments of the Parties

Revenue's Arguments

  • The Revenue, during the Tribunal hearing of the appeals, advanced an alternative contention that partners of J.S. Distributors who were related to the karta of the HUF should be regarded as the karta's representatives or benamidars, and that their share of business profits ought to be treated as the HUF's income.
  • At an earlier stage in the registration appeal, the Departmental Representative stated that the Department had no contention against the genuineness of either the partnership deed or the deed of agreement (i.e., the Department admitted genuineness in those proceedings).

Assessee / Appellate Assistant Commissioner's Position

  • The Appellate Assistant Commissioner had held in appeals that the firm J.S. Distributors was a genuine firm and that the business conducted by it was its own business; on that basis, the AAC had deleted the addition of the firm's income to the HUF's total income.
  • At the High Court hearing, Mr. Bajoria, learned counsel for the assessee, did not press the first question (concerning admission of new ground) and relied on the Tribunal's findings in relation to genuineness when addressing the second question.

Other Contentions Noted by the Court

  • The Department (in later submissions recorded in the opinion) admitted the genuineness of the firm and the agreement but contended that, even on the basis of the agreement, the wife and son did in fact represent the HUF within the partnership and their profit share should be treated as the HUF's income.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Income-tax Appeal No. 136 of 1968–69 (earlier Tribunal order) Reasonings relating to the genuineness of the partnership and the weight of suspicious circumstances vis-à-vis the terms of the deed of agreement. The Tribunal in the registration appeal stated it was in respectful agreement with the reasonings in this earlier order; the High Court noted the Tribunal had relied on those earlier reasonings in assessing genuineness.
Consolidated Tribunal order dated 21 September 1973 Conclusion upholding the Appellate Assistant Commissioner's finding that J.S. Distributors was a genuine firm for registration purposes. The High Court records that the Tribunal in that consolidated order upheld the AAC's action finding the firm genuine; the Tribunal nevertheless, in the present appeals, entertained an alternative contention and added 52% of profits to the HUF's income.
Tribunal order dated 7 February 1975 (deletion of underlined portion) Modification/deletion of part of a prior Tribunal order (the opinion records that an underlined portion was deleted by this order). The High Court mentions this subsequent Tribunal order had deleted an underlined portion of the Tribunal's earlier reasoning; the court records this fact as part of the factual matrix it considered.

Court's Reasoning and Analysis

The High Court considered the sequence of findings at various stages and the materials before the Tribunal. Key points of the Court's analytic narrative are:

  • The Tribunal in the registration appeal had examined suspicious circumstances raised by the ITO but found them explicable by reference to the terms and conditions of the deed of agreement; the Department in that proceeding had admitted it had no contention against the genuineness of the partnership deed or the agreement.
  • In the present appeals (quantum appeals), the Tribunal nonetheless entertained the Revenue's alternative contention that the wife and son of the karta (who together held 52% of the firm's profit share) were in reality representing the HUF, and on that basis held that 52% of J.S. Distributors' business profits should be added to the HUF's income.
  • The Tribunal's findings supporting the addition were based on facts such as: small recorded capital contributions by the wife and son (Rs. 2,731 shown for the wife's capital), the licences obtained by the HUF being made over to the firm, availability of the HUF's office to the firm, the active participation of the karta in conducting the firm's business, HUF bearing travelling and hotel expenses, operation of the firm's bank account from the karta's account, and the business being done in the HUF's name and from its office. The Tribunal interpreted these facts as indicating a larger measure of interest by the HUF than would be warranted by a fixed commission and thus inferred that the wife and son represented the HUF.
  • The High Court concluded that the Tribunal did not consider all relevant facts and materials before reaching that conclusion. Specifically, the Court observed that the Tribunal failed to consider fully the effect of the agreement relied upon in the registration appeal, and that subsequent documents (affidavits and wills) that had been produced were not given specific findings. The Court noted the Tribunal had decided the issue on an alternative contention that was taken for the first time before it, meaning parties had not had opportunity to adduce all germane evidence on that alternative point.
  • Given these deficiencies, the High Court held it would be just and proper for the Tribunal to rehear the appeal in the light of all evidence produced both in the registration appeal and in the quantum appeals. The Court directed that, if necessary, the Tribunal may remand the matter to the Assessing Officer to consider various evidence or affidavits and furnish a remand report for the Tribunal's fresh consideration. The parties were to be at liberty to adduce further evidence before the Tribunal. The Tribunal could also, if appropriate, examine deponents of affidavits or refer matters to the Assessing Officer for fresh determination.

Holding and Implications

Primary holding: The Court declined to answer the first question (as counsel for the assessee did not press it), and declined to answer the second question. Instead, the Court directed that the Tribunal should rehear and dispose of the appeal afresh in accordance with the observations made in the judgment.

Direct consequences and implications:

  • The Tribunal is directed to rehear the appeals, taking into account fully the evidence that was produced before it in the registration proceedings and in the quantum appeals, including affidavits and wills mentioned in the record.
  • If necessary, the Tribunal may remit issues to the Assessing Officer for fresh enquiry and a remand report, after which the Tribunal must give a fresh finding. Parties are at liberty to adduce such evidence as they may be advised before the Tribunal.
  • The Tribunal may examine deponents of affidavits or refer affidavits/documents to the Assessing Officer for determination, as it deems fit.
  • No order as to costs was made.
  • The opinion does not announce any new general legal principle beyond directing a rehearing; it addresses the disposition of the specific appeals and does not purport to lay down a new precedent on the broader question.

Disposition: The reference questions were not answered; the Tribunal was directed to rehear and dispose of the appeal afresh in accordance with the Court's observations. No order as to costs.

Show full summary ...

    Jiwanram Sheoduttrai v. Commissioner Of Income-Tax.

    Ajit K. Sengupta, J.:— At the instance of the assessee, the following two questions of law have been referred to this court for the assessment years 1963–64, 1964–65 and 1965–66 under section 256(2) of the Income-tax Act, 1961:

    “1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in admitting a new ground for the first time before the Tribunal, namely, the question of benami with regard to the share income of Smt. Savitri Debi and Deepak Prakash?

    2. Whether, the finding of the Tribunal that the wife and son of Sri Satyanarain Prasad were really representing the Hindu undivided family and 52 per cent of the business profits of Messrs. J.S Distributors was to be added to the income of the assessee is based on any evidence and/or material and/or partly on irrelevant materials and partly on its failure to consider the relevant materials and/or based on mere conjecture or surmise and perverse?”

    2. The facts relating to this reference are that the assessee is a Hindu undivided family carrying on business with its head office in Calcutta and a branch office at Varanasi. The assessment years are 1963–64 to 1965–66 and the relevant accounting years ended on Diwali 1962 to 1964, respectively. At all material times, the assessee-Hindu undivided family consisted of Sri Satyanarain Prasad (karta), his wife, Smt. Savitri Debi, and amongst others, his son, Sri Deepak Prakash. Smt. Savitri Debi and Sri Deepak Prakash were also partners in a firm styled Messrs. J.S Distributors which was constituted under a deed of partnership dated July 7, 1959. On January 15, 1960, the assessee-Hindu undivided family entered into an agreement with the said Messrs. J.S Distributors under which the said Messrs. J.S Distributors agreed to execute the business secured by the assessee-Hindu undivided family on payment of commission of two per cent of the gross sales in terms of clause 2(a) of the said agreement.

    3. In the case of J.S Distributors, right from the assessment year 1962–63 the Income-tax Officer refused to grant registration under section 185 of the Act on the ground that the said partnership firm was not a genuine entity. In appeals preferred by the said firm before the Appellate Assistant Commissioner in respect of the assessment years 1962–63 to 1967–68, the Appellate Assistant Commissioner held that the said firm was a genuine firm and it should have been granted registration under section 185 of the Act. Aggrieved by the order of the Appellate Assistant Commissioner, the Revenue preferred appeals before the Tribunal, in respect of those years and the Tribunal in its consolidated order dated September 21, 1973, upheld the action of the Appellate Assistant Commissioner.

    4. For the assessment years under reference, the Income-tax Officer included the entire income of Messrs. J.S Distributors in the total income of the assessee as he was of the view that the firm of Messrs. J.S Distributors was not a genuine firm and the business done by it was really conducted by the assessee.

    5. In appeals before the Appellate Assistant Commissioner, the Appellate Assistant Commissioner deleted the income of the said firm from the total income of the assessee as he had already held in the case of the said firm that it was a genuine firm and the business conducted by it was its own business.

    6. Against the said orders of the Appellate Assistant Commissioner, the Revenue preferred appeals before the Tribunal while the assessee filed cross-objections (with which we are not concerned in the present reference). At the time of hearing of the appeals, the Revenue took up an alternative contention that in any event such of the partners of Messrs. J.S Distributors who were related to the karta of the assessee-Hindu undivided family are to be taken as his representatives or benamidars and that their share in the business profits of the years under reference is to be treated as the profit of the assessee.

    7. The Tribunal after considering the rival submissions of the parties entertained the alternative stand taken on behalf of the Revenue and held that 52 per cent of the business profits of Messrs. J.S Distributors in the year under reference should be added to the total income of the assessee.

    8. At the hearing, Mr. Bajoria, learned counsel, has very fairly stated that he does not press question No. 1 and, accordingly, we decline to answer the first question.

    9. So far as the second question is concerned, Mr. Bajoria, learned counsel, has drawn our attention to the finding of the Tribunal in the appeal arising from the refusal to register the firm holding the firm to be not genuine. There the Tribunal observed as follows:

    “We have heard the rival submissions made before us. We have also gone through carefully the earlier order of the Tribunal in Income-tax Appeal No. 136 of 1968–69. We are in respectful agreement with the reasonings given therein. The learned Departmental Representative stated before us that the Department has no contention against the genuineness of either the partnership deed or the deed of agreement. As observed by this Tribunal in its earlier order, the various suspicious circumstances pointed out by the Income-tax Officer which we find no need to refer to in detail, are not unexplainable with reference to the terms and conditions in the deed of agreement. Even if we may for the present purpose of argument even without going into that question, take it that the four partners who are related to Sri Satyanarayan Prasad, the karta of the Hindu undivided family, are only his nominees and, therefore, the representatives or the benamidars of the Hindu undivided family, the fact remains that the other three partners are in no way related to any one of the others or to Sri Satyanarayan Prasad. They are residents of Delhi and other places and as we shall see presently have also been actively participating in the affairs and business of the firm. Smt. Vidyavathi Murgai and Sri Pran Krishna Murgai are the wife and son of one who was a deputy secretary in the Government of India. As observed by the Tribunal in its earlier order, if these outsiders had really taken interest in the firm and also participated in its affairs as partners, that would certainly go a long way in proving the genuineness of the firm.”

    10. The Tribunal, in dealing with the appeals giving rise to the present reference, however, observed as follows:

    “Of the seven partners of Messrs. J.S Distributors, at least three are absolute strangers, totally unconnected or unrelated with the Hindu undivided family. Two others no doubt are brothers-in-law of Sri Satyanarayan Prasad, the karta of the Hindu undivided family. But for that reason alone we are not prepared to hold that they are the nominees or benamidars of the Hindu undivided family. As taken note of by us in our order on the registration of the firm, the letters produced there on the side of the firm showed that at least Sri Kailash Pathi, one of the brothers-in-law of the karta, was taking active part in the business as a partner. Nothing is placed before us to indicate that the position with regard to his brother was in any way different.

    The same, however, in our opinion, cannot be said about the wife and son of Sri Satyanarayan Prasad. Between them they share to the extent of 52 per cent. Though the wife of Sri Satyanarayan Prasad is shown to have invested Rs. 2,731 as her share of the capital, nothing is produced before us to show that she by herself could have contributed the same. Similar is the case with her son in respect of the amount, if any, shown as his capital investment. It was the licences secured by the Hindu undivided family that were made over to the firm to exploit. The office of the Hindu undivided family was made available to the firm. Though Sri Satyanarayan Prasad himself was not a partner, we find him having taken a very active part in conducting the business. Much has been spent on his travelling and hotel expenses in connection with the business of the firm. It is his bank account that is allowed to be operated on behalf of the firm. The business was also being done in the name of the Hindu undivided family and from its office. All these, as we see them, indicate the large measure of interest which the Hindu undivided family was taking in the business. We are not prepared to explain this as only on account of the fixed commission percentage that it was to get under the terms of the agreement. In our view, these rather show a much bigger interest that the Hindu undivided family really had in the business. The same can be explained only if the wife and son of Sri Satyanarayan Prasad are considered as really representing the Hindu undivided family. In this view that we take, we hold that 52 per cent of the business profits of J.S Distributors in these years is to be added as the income of the Hindu undivided family. To this extent alone we allow the Department's appeals.”

    11. It may be mentioned that subsequently by an order passed by the Tribunal on February 7, 1975, the underlined portion of the aforesaid order has been deleted.

    12. It appears that the Tribunal in holding that 52 per cent of the business profit of Messrs. J.S Distributors be added to the income of the Hindu undivided family on the ground that the wife and the son of Sri Satyanarayan Prasad who in between themselves held 52 per cent share of profit of the partnership firm in fact represented the Hindu undivided family, did not consider all the facts of the case which are relevant for the purpose of determining this issue. The Department while admitting the genuineness of the firm as well as the agreement in question contended that even on the basis of the agreement the conclusion follows that the wife and son of Sri Satyanarayan Prasad did really represent the Hindu undivided family in the partnership firm. In our view, the Tribunal did not decide the question in the proper perspective. All the documents and evidence relevant for deciding this issue have not been considered. The Tribunal did not consider the effect of the agreement which had been relied upon before the Tribunal in the case arising out of the registration appeal. It also appears in the subsequent years that further documents by way of affidavits and wills had also been relied upon but no specific finding has been given by the Tribunal. In our view, therefore, it will be just and proper that the Tribunal should rehear the appeal in the light of the evidence which was produced before the Tribunal in the registration appeal as well as the quantum appeals out of which the present reference arises. If necessary, the Tribunal will be at liberty to remand the matter back to the Assessing Officer to consider the variety of evidence or affidavit and after considering the remand report of the Income-tax Officer, the Tribunal shall give a fresh finding. Parties will be at liberty to adduce such evidence as they may be advised before the Tribunal inasmuch as the Tribunal decided the issue on an alternative contention taken for the first time before the Tribunal and accordingly the parties did not have the opportunity to bring all the evidence which was germane for determining the question whether the wife and son of Sri Satyanarayan Prasad had really represented the Hindu undivided family notwithstanding the agreement or other evidence relied upon by the assessee. It will be for the Tribunal either to examine the deponents of any of the affidavits or refer the same to the Assessing Officer for fresh determination.

    13. In that view of the matter, we decline to answer the second question and direct the Tribunal to dispose of the appeal afresh in accordance with the observations made in the judgment. No order as to costs.

    Bhagabati Prasad Banerjee, J.:— I agree.

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    Comments

    Jiwanram Sheoduttrai v. Commissioner Of Income-Tax.
    (Aug 8, 1990)