ORDER
B.L. Crhibber, A.M.
The only grievance projected in this appeal by the revenue is that the learned Commissioner (Appeals) is not justified in cancelling the order passed by the assessing officer under section 186(1) of the Income Tax Act.
2. The assessee had filed a return of income declaring income of Rs. 40,000. The same was assessed under section 143(1) . Alongwith the said order passed on 31-8- 1987 under section 143(1) , order under section 185(1) (a) was also passed granting registration to the firm with reference to the application filed on 19-3-1985. The assessee-firm consisted of three partners, viz., (i) Shri Narendra Singh B. Bindra, (ii) Smt. Gurubindar Kaur K. Bindra, (iii) Smt. Manjit Kaur Harvindar Singh Bindra.
3. There were proceeding of search under section 132 carried out in this group of assessees on 6-7- 1989 in the course of which two lady partners, namely, Smt. Manjit Kaur and Smt. Gurubindar Kaur were examined. It appears that in their statements recorded at the time of search, they had not shown sufficient acquaintance with the affairs of the firm and therefore, the proceedings were taken to cancel registration of the firm for the assessment years 1989-90, 1990-91 and 1991-92. In these three years, the income of the assessee-firm was clubbed in the hands of M/s Gurunanak Industries, Aurangabad for the detailed reasons given in those orders. Basing himself on these orders, the assessing officer issued notice for cancellation of registration under section 186(1) for the.year under appeal which
was the first year of the assessee-firm for which registration was originally granted.
4. In response to the notice issued under section 186(1) , it was contended on behalf of the assessee that at no point of time in the statement recorded of the lady partners they had denied to be partners of the firm. It was further stated that these two ladies were under mental tension and that they had confused state of mind and therefore, it could not be said that reasonable opportunity was given to the assessee before cancellation of registration for the assessment years 1989-90, 1990-91 and 1991-92. It was further pointed out that cancellation of registration for these three years was to be decided in appeal before the Commissioner (Appeals) and for this reason cancellation for the year under appeal should be kept pending. According to the assessee, all the conditions for grant of registration were satisfied and there was no warrant for cancelling the same.
5. These contentions were, however, rejected by the assessing officer. Relying on the reasoning given for the assessment years 1989-90 and 1990-91 he held that the present firm M/s Gurunanak Concrete Products was floated basically to divert the income of M/s Gurunanak Industries, Aurangabad. He held that the firm was granted registration for the assessment year 1985-86 without examining the issue in right perspective. He held that these two ladies in their statements showed ignorance of the name of the firm in which they were partners as also regarding the capital contribution as well as sources of income. Smt. Gurubinder Kaur had deposed that she was a partner in the firm M/s Gurunanak Industries when actually she was not a partner in that concern. The nature of business described by her also was incorrect. According to the assessing officer this fact clearly showed that the firm was not genuine and was floated to divert the income of M/s Gurunanak.. Industries by introducing two wives of the main partner of M/s Gurunanak Industries, Aurangabad. Registration was therefore, cancelled under section 186(1) .
6. On appeal, the learned Commissioner (Appeals) reversed the finding of the assessing officer. In dealing with the finding of the assessing officer, that there was a failure on the part of the assessing officer under section 185 in not examining the issue, the Commissioner (Appeals) held that if it was so the proper remedy was under section 263 and not under section 186(1) . This was because the assessing officer’s case was not that registration was granted after making enquiries and because of subsequent evidence it was being cancelled, but the assessing officer’s case was that there was no enquiry in the first place at the time of granting registration. According to him, therefore, the order under section 186 was not justified and if at all action should have been taken under section 263.
7. In dealing with the ignorance of the lady partners, the Commissioner (Appeals) held that the statements of these ladies in the course of search proceedings would have been given under pressure and that not much reliance could be placed on the statements. He held that the partnership involved concept of agency and as far as the present firm was concerned, there was a male partner Shri Narendra Singh B. Bindra who could have validly acted on his behalf as well as on behalf of these two ladies. A partnership could not necessarily become non-genuine only because one of more partners were not aware of the details about the partnership business as held in the case of United Patel Construction Co. v. CIT (1966) 59 ITR 424 (MP).
8. In dealing with the objection that the firm had not maintained proper books of account from the issue arising from the order for assessment year 1989-90, according to the Commissioner (Appeals), non-maintenance of books was not sufficient reason for refusing registration. He relied upon the following cases :
(i) V.K. Kurian & KP. George v. CIT (1967) 63 ITR 675 (Ker)
(ii) CIT v. Chandra & Co. 1976 CTR (All) 135
(iii) Ozhukal Ouseph v. Dy. CIT (1978) 113 ITR 894 (Ker)
9. As regards the contention that the present firm had been floated to divert the income of M/s Gurunanak Industries, Aurangabad, by introducing two wives of the main partners, the Commissioner (Appeals) did not find any merit in the said claim. According to him, the motive behind floating the firm of M/s Gurunanak Concrete Products was not with a view to. divert income or reduce the tax liability of M/s Gurunanak Industries. The Commissioner (Appeals) relied on the decision of the Hon’ble Bombay High Court in the case of Central Talkies Circuit Matunga, In re (1941) 9 ITR 44 (Bom) for the proposition that the motive for forming a partnership firm had no relevance.
10. Lastly, the Commissioner (Appeals) concluded that as per section 4 of the Partnership Act, there exists a genuine partnership if there was an agreement to share the profits or losses of the business and if the business was carried on by all the partners or any of them acting for all. In taking the decision, the assessing officer had relied on the statements given by the lady partners in the course of search under section 132. It was not clear to him as to why it was not deemed necessary to examine the third partner who was a male partner who was looking after the business of the partnership and managing its affairs. The learned Commissioner (Appeals), therefore, concluded that there were no valid reasons recorded by the assessing officer to justify the finding that the assessee-firm was not a genuine firm. He therefore, cancelled the order under section 186(1) and held that the original order granting registration under section 185(1) (a) stood revived.
11. Shri Shishir Agarwal, the learned departmental Representative mainly repeated the arguments of the assessing officer in, cancelling the registration. He pointed out to the fact that these two lady partners showed ignorance in the affairs of the firm when they were being examined during the search proceedings. According to him, this clearly showed that they were not partners in the firm and the said firm was only floated to divert the income of the main partnership M/s Gurunnanak Industries. He next submitted that the observations of the learned Commissioner (Appeals) that recourse to section 263 ought to have been made is also improper inasmuch as the order under section 186 was prefectly legal and was passed after complying with all the necessary conditions in that regard. He submitted therefore, that there was no warrant for presuming that order under section 186 was not properly passed in any case. He therefore, sought restoration of the order of the assessing officer in refusing registration under section 186(1) of the Act.
12. On the contrary, Shri K.A. Sathe, the learned counsel for the assessee, subrnitted that assessee-firm. complied with all the legal requirements, viz., there was a partnership deed in writing, specifying the shares of profits and losses of the concerned partners, the firm was duly registered with the Registrar of Firms as also with the Director of Industries as a small scale industrial unit. Referring to the statement of Smt. Manjit Kaur Harvinder Singh Bindra which was recorded on 5-12-1990, during the proceedings for the assessment year 1990-91, it was contended that this statement had been ignored by the assessing officer altogether. He particularly referred to. question No. 7 (p. 13 of paper book) wherein Smt. Manjit Kaur confirmed that she h ad contributed capital of Rs. 25,000; she had correctly stated the other two partners; she had also pointed out that Shri Narendra Singh Bindra was working partner and she correctly answered about business of the said firm. Then, in answer to question No. 8 she had stated that she had 1/3rd share in the said firm. She had confirmed in answer to question No. 11 that on various documents of the firm her handwriting was found, that the firm had an account with Punjab & Sind Bank , that the firm had two trucks and a pavar em According to Shri Sathe, this statement of 9-12-1990, which was recorded before the cancellation for present assessment year on 10-2-1994 and was on record, ought to have been considered by the assessing officer.
13. Shri Sathe further contended that at the time of search questions that were asked were only general and were not directed in regard to the affairs of the firm alone. He referred to the entire statement during the course of search. In explaining the nature of her source of income, she did say that she was a partner in the firm. In answer to question 19 (p. 20 of paper book) she did state the names of the partners of the firm correctly and also had stated the details of the Bank account. In regard to the statement of other lady partner Smt. Gurubindar Kaur recorded at the time of search, it was contended by the counsel that questions which were asked to her themselves were very confused because in question No. 6 she was asked as to who were the partners in Gurunanak firm. It was quite likely that because of the pressure of the search the said lady got confused about the name of the firm and wrongly stated that shb was a partner in the firm M/s Gurunanak Industries.
14. Shri Sathe further referred to the fact that the male working partner Shn Narendra Singh Bindra was examined during the course of search and questions were asked to him about the affairs of M/s Gurunanak Concrete Products, the present firm. In reply to question No. 8 (p. 33 of paper book), he stated tha t no accounts of the firm were maintained. In answer to question No. 14 wherein it was asked why income of the firm could not be clubbed in the hands of M/s Gurunanak Industries because the lady partners had not shown any knowledge, Shri Narendra S, Bindra had clearly replied that the lady partners’ reply was incorrect that they were silent partners and the fact that no accounts were kept did not mean that the firm was not genuine. He asserted that in fact the two firms were independent. By referring to these statements, Shri Sathe stated that while cancelling the registration, the assessing officer had failed to give a specific opportunity to the concerned partners and had failed to obtain their statements independently; enquiry during the course of search was only a general enquiry and not much reliance could be placed on the so-called ignorance of the partners. In fact, the subsequent statement of Smt. Manjit Kaur very clearly showed that she had full knowledge about her involvement as a partner in the said firm and it could not be said that she was not a genuine partner.
15. I have considered the rival submissions and perused the facts on record. In my opinion, the Commissioner (Appeals) has rightly reversed the finding of the assessing officer for the detailed reasons given by him in his impugned order. Registration has been cancelled mainly on the ground that the two lady partners during the course of their statements recorded during thecourse of search have not shown sufficient acquaintance of the affairs of the firm. In this case, it is an admitted fact that the firm was constituted by a valid partnership deed. The two ladies had contributed capital and they were not working partners. The working partner was Shri Narendra Singh Bindra who was validly acting on his behalf as well as on behalf of the two ladies. A partnership could not necessarily become nongenuine only because one or more partners were not aware of the details about the partnership business as held in the case of United Patel Construction Co. v. CIT (supra). The decisions of the Madras High Court in the case of & S.A. Gangamrithammal & Co. v. CIT (1969) 74 ITR 473 (Mad) also supports the case of the assessee. In this case, four ladies of the age group of over 55 years constituted themselves into a partnership and appointed two persons, one of whom was the son of one of the ladies as agents to carry on the business of the partnership. The Income Tax Officer examined the four ladies on oath and came to the conclusion that their oral testimony disclosed that it was not a genuine partnership and hence refused registration. This was confirmed by the Tribunal. The Hon’ble High Court, however, held, on an overall impassionate scrutiny of the evidence recorded by the Income Tax Officer that there was nothing suspicious about the document and the conditions essential for securing registration. According to the High Court, when all the partners who were examined gave material particulars regarding the business and its activities and, therefore, the fact that they had appointed an agent to carry on the business did not militate against the genuineness of the firm. A similar view has been held in the case of Subhash Medical Stores v. CIT (1984) 147 ITR 486 (Raj).
16. In the light of above discussion, I hold that the learned Commissioner (Appeals) has rightly reversed the findings of the assessing officer and accordingly, I decline to interfere.
17. In the result, the appeal is dismissed.