ORDER
Ajay Kumar Mittal, J.
1. At the instance of the assessee, the Income-tax Appellate Tribunal (for short ‘the Tribunal’), has referred the following questions of law under Section 256(1) of the Reports IT Act, 1961 (for short, ‘the Act’), stated to be arising out of order dt. 26th June, 1989 of the Tribunal relating to asst. yr. 1983-84 :
“(1) Whether, on the facts and circumstances of the case, the Tribunal has rightly interpreted Clause 4 of the agreement dt. 24th June, 1982 ?
(ii) Whether, on the facts and circumstances of the case, the Tribunal has justifiably on facts and in law vacated the order of the learned first appellate authority and restored that of the learned ITO ?”
2. The backdrop of the case giving rise to the above questions of law in brief is that a firm in the name and style of M/s Special Steel Components Corporation was brought into existence on 29th May, 1979 consisting of following partners :
(a) N.K. Gupta s/o Shri S.L. Gupta,
(b) S.L. Gupta s/o Shri Late Sukh Dayal,
(c) V.K. Gupta s/o Shri S.L. Gupta,
(d) Durga Dass Goyal s/o Munshi Ram,
(e) Ashok Kumar s/o Durga Dass.”
3. On 31st March, 1982, a retirement deed was executed and Shri Ashok Kumar Goyal was retired from the partnership. A new partnership deed dt. 24th June, 1982 was executed between the remaining partners and business was carried out in the same name and style. Another agreement on 24th June, 1982 was executed between Shri N.K. Gupta, one of the partners and Shri Ashok Kumar Goyal. The relevant Clause 3 and 4 of that agreement are reproduced as under:
“3. That Shri Ashok Kumar shall be entitled to 50 per cent of the net profit of the steel furniture division and shall be entitled to withdraw a sum of Rs. 700 (Rs. seven hundred) per month against his share of profit. In case of inadequacy of profit. Shri Ashok Kumar shall be entitled to a minimum of Rs. 8,400 per year (Rs. eight thousand four hundred only) as his share of profit from the firm, which shall be his guaranteed share or profit.”
“4. That Shri Ashok Kumar shall be liable to share all liabilities of the furniture division of the firm.”
4. The AO vide order dt. 31st Aug., 1984 refused registration to the firm by making following observations :
“During the year under consideration, the firm paid to Shri Ashok Kumar the guaranteed profit of Rs. 8,400 out of profit earned by the branch, i.e., M/s Uphaar Steel Furniture Division. From the above, it is observed that, in fact, the agreement means the sharing or profits by Shri Ashok Kumar Goyal without being a partner. This has been done with a view to reduce the profits and hence, tax liability. I, therefore, hold that Shri Ashok Kumar remained a Benami partner in the firm as evidenced from the agreement. The profits have also not been distributed amongst the partners in accordance with terms of Partnership Act. I, therefore, hold that the firm was not genuinely constituted and refuse registration to the firm for the asst. yr. 1983-84.”
5. Aggrieved by the order of the AO, the assessee preferred an appeal to the CIT(A), Ambala Range, Ambala, which was accepted. However, the said decision was reversed by the Tribunal and the order of the AO was restored. The Tribunal, on a consideration of the material on record and hearing the parties vide order dt. 26th June, 1989, held as under :
“In the light of the preceding paragraphs, we are of the view that the arrangement arrived at by the four partners and Shri Ashok Kumar Goyal, was with set purpose of reducing the incidence of tax by diverting the profit and not for the purpose mentioned in the agreement. The apparent was not real and real was not made apparent. The whole arrangement was sham and part of it without legal sanction, especially pertaining to the provisions in Clause 4 of the agreement. We, thus, hold that the learned AAC was not justified to disturb a correct finding recorded by the learned ITO in the present case. We vacate the same and restore that of the learned ITO.”
6. Hence, the reference at the instance of the assessee claiming that the aforementioned questions of law arise from the order of the learned Tribunal for the opinion of this Court.
7. Learned counsel for the assessee submitted that the Tribunal has misinterpreted Clause 4 of agreement dt. 26th April, 1982 and, therefore, the conclusion arrived at by the Tribunal is vitiated by an error of law. As against this, learned counsel for the Revenue cited Ratanchand Daibaiilal v. CIT (1985) 155 ITR 720 (SC), to contend that the genuineness or otherwise of a firm is a finding of fact and the findings recorded by the Tribunal should not be interfered by the High Court in its advisory jurisdiction.
8. We have considered the submissions of the learned counsel for the parties and perused the paper book. The Tribunal after appraising the entire material on record, has recorded a finding of fact that the arrangement between four partners and Shri Ashok Kumar Goyal was sham and was not real and the same has been entered with a view to reduce the incidence of taxation by diverting the profits of the partnership firm and was not for the purpose as mentioned in the agreement. Learned counsel for the assessee has not been able to pinpoint any error or misreading of evidence on the basis of which he could claim that said finding is perverse. Moreover, no question of law has been claimed by the assessee on that aspect of the matter.
9. A perusal of Clause 3 and 4 of the agreement as reproduced above, clearly shows that Shri Ashok Kumar Goyal was made entitled to 50 per cent share of the profits in the sale of furniture division and at the same time, he was sought to be excluded from the partnership deed as well. This attempt on the part of the assessee was clearly aimed at reducing the profits and hence, the tax liability of the firm and at the same time, granting the erstwhile partner Shri Ashok Kumar Goyal all the benefits of partner as he was enjoying before his retirement. Agreement dt. 24th June, 1982 is, thus, not genuine. The learned CIT(A) while reversing the order of the AO refusing registration to the assessee-firm had not considered Clause 4 of the agreement dt. 24th June, 1982, and also failed to appreciate that although Shri Ashok Kumar Goyal, the erstwhile partner had been excluded from the earlier partnership, he was still granted all the benefits which were being enjoyed by him earlier. Therefore, the Tribunal rightly reversed the said order and restored that of the AO.
10. In view of the above, the reference is answered against the assessee and in favour of the Revenue.
