The Commissioner Of Income-Tax ... vs M/S. Riviera Apartments ...
2001 Latest Caselaw 254 Del

ORDER

D.K.Jain, J.

1. Pursuant to the directions issued by this Court under Section 256(2) of the Income-tax Act, 1961 (in short 'the Act'), at the instance of Revenue, the Income-tax Appellate Tribunal Delhi Bench-E ('the Tribunal' in short), has referred the following questions for our opinion:

"1. Whether on the facts and in the circumstances of the case the Income-tax Appellate Tribunal was correct in law in holding that the assessed firm was genuinely constituted and was eligible for the benefit of registration under the Income-tax Act, 1961 for the assessment year 1971-72 ?"

"2. Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in holding that omission of certain partners as mentioned in the partnership deed dated 27.3.1969 from the partnership deed dated 14.5.1969 and 19.5.1969 did not tantamount to a major change in the constitution of the assessed firm and did not adversely affect the grant of registration in this case ?"

"3. Whether on the facts and in the circumstances of the case the Income-tax Appellate Tribunal was legally correct in holding that M/s. Riviera Apartments (P) Ltd., were acting only in a representing capacity for the firm particularly when the name of the vendor in the agreement with the purchasers was shown as that of the company ?"

2. Since answer to the questions referred would primarily depend on the factual aspects determined by the Tribunal, it would be necessary to notice the facts found by the Tribunal in a little greater detail. Dispute is with regard to the refusal of registration to the respondent-assessed firm in respect of assessment year 1971-72. The relevant previous year ended on 30th April, 1970. The assessed made an application in Form No.11-A on 10th April, 1970. Along with the application a copy of the deed of partnership dated 19th May 1969, under which the assessed firm was constituted, was also filed.

3. The partnership deed dated 19th May 1969 referred to an earlier deed of partnership dated 14th May 1969. According to the latter deed the firm was to carry on business of construction of multi-storeyed residential buildings on a plot of land at Hailey Road, New Delhi. The firm's business was to be under the name and style of M/s. Riviera Apartments Construction Company. Under the deed of 14th May 1969 the partners were seven individuals and one limited company viz., M/s. Riviera Apartments Private Limited (hereinafter referred to as the company). The company was described as "the builder promoters". Out of the seven individuals (excluding one Smt. Raj Mohini Suri) six were described as land owners with a total share of 26% in the profits of the firm. In the deed of partnership dated 19th May 1969 three minors were admitted to the benefits of the partnership. Both the deeds referred to an agreement dated 27th March 1969, whereunder price of the plot of land was fixed at Rs.12,27,150/-. It was provided in that agreement that this amount would be paid to the six land owners. The agreement dated 27th March 1969 was actually between the "builder promoters" on the one hand and the land owners ( comprising eight individuals ) on the other. Out of the land owners group, six became partners in the firm under deed of partnership dated 14th May 1969 and again on 19th May 1969. But the other two namely., Smt. Shanti Devi and Smt. Kanta Devi did not do so. These six formed the land owners group with a total share of 26% in the profits of the firm under both the deeds. The party of the second part to the agreement dated 27th March 1969 ( referred to as builder promoters ) comprised one Miss Vandana Chaudhary (minor), Smt.Raj Mohini Suri and the company. As per that agreement the land owners and the builder promoters were to erect multi-storeyed residential building on the said plot of land; the flats in the said building were to be sold on ownership basis by the builder promoters to the public on such terms and conditions as they deemed fit and proper; and for the propose, the land owners and the builder promoters were to form a partnership in the name of M/s. Riviera Apartments Construction Company. The net profit from such sale of flats was to be divided in the proportion of 26% for the land owners and 74% for the builder promoters.

4. The Income-tax officer refused to grant registration to the assessed firm, mainly for the reasons: (1) the business of construction on the plot and sale of apartments was in fact carried on by the company on its own behalf and not on behalf of the assessed firm because: (a) in the sale agreements, entered into by the company with the purchasers of the flats, the company was described as the vendor (b) during the previous year ten flats were booked for a total consideration of Rs.15,60.000/- and the advance received against the said bookings was deposited in the company's bank account and there was no entry regarding the bookings in the books of account of the firm, (c) some of the expenditure incurred for the construction was borne by the company in the first instance and (d) occupation certificate from the NDMC was applied for and obtained in the name of the company; (2) Clause 4 of the partnership deed dated 14th May 1969 required contribution of capital by Smt. Raj Mohini Suri and the company, but deed dated 19th May 1969 provided that the capital would be contributed not only by Smt. Raj Mohini Suri and the company but also the minors admitted to the benefits of the partnership but in fact the minors did not make any contribution towards capital (3) under the agreement dated 27th March 1969 Smt. Kanta Devi and Smt. Shanti Devi were part of the group described as land owners in the agreement but they did not become partners under the latter deeds of partnership. Though Ms. Shefali Chaudhary and Ms. Manu Mehra, two minors, did not figure at all either in the agreement dated 27th March 1969 or in the deed dated 14th May 1969 but they were entitled to a share in the project in the final deed of partnership and, thus, there was no consistency at all between the agreement dated 27th March 1969 and the deeds dated 14th May 1969 and 19th May 1969. The Income-tax Officer, therefore, came to the conclusion that not only some of the terms of partnership deed had been violated but no business had been carried on by the partnership firm. He, thus, held that there was no valid partnership and accordingly refused registration to the assessed.

5. Being aggrieved, the assessed preferred appeal to the Appellate Assistant Commissioner ( in short the 'AAC'). The AAC upheld the order of the Income-tax Officer. While giving detailed reasons for sustaining the order, he also took into account an additional fact that the firm never became the owner of the land as it remained registered in the name of the original owners. The assessed carried the matter in further appeal to the Tribunal. The Tribunal held that in the light of the principle of law laid down by the Supreme Court in the matter of grant of registration in the case of K.D. Kamath & Co. v. CIT Mysore , a valid partnership did come into existence and therefore, the assessed firm was entitled to registration. While holding so, the Tribunal analysed the aforenoted objections taken by the lower authorities with reference to both deeds of partnership and the agreement dated 27 March 1969 and concluded thus:

(a) The medium of partnership was adopted to give effect to the agreement dated 27th March, 1969 arrived at between the land owners, because they had the land but not the expertise to exploit it whereas the builder promoters had the expertise but not the land; (b) though it was true that Kanta Devi and Shanti Devi, parties to the agreement dated 27th March 1969, did not figure in the partnership deeds but there was an explanation for the same inasmuch as they had released their interest in the land as per the release deed executed on 19th August 1969 and registered on 26th August 1969 and except for mere suspicion on the part of the authorities, there was no material on record to hold that the release deed was not genuine; (c) none of the parties comprising the land owners group was the benamidars or the nominees of any other party including the company; (d) there was a similar readjustment as regards capital contribution as well as the admission of minors to the benefits of the partnership, which was purely an internal matter based on mutual agreement between the parties, which did not militate against the assessed's claim for registration; (e) nothing much turned on the description of the company as the vendor in the agreements for sale of flats because it was clear from the preamble to the standard agreement between the company and the prospective buyers that the company was acting only in a representative capacity; (f) even though the sale proceeds of the flats were not deposited in the bank account of the firm straightway and some of the expenses were jointly incurred by the company in the first instance but this fact did not mean that the receipts and expenses of the firm had not been accounted for; (g) a full and complete account was maintained by the managing partners in respect of the transactions of the project in terms of the partnership deed dated 19th May 1969, clause 7 whereof provided that Smt. Raj Mohini Suri and the company (both of builder promoter group) shall be the managing partners of the firm; (h) there was no substance in the charge against the assessed that the condition of the partnership deed relating to the maintenance of accounts had been violated; (i) it was true that the bank account could be operated only by the managing partners but this restriction, which was a part of the agreement between the partners constituting the firm, could not come in the way of registration; (j) no significance could be attached to the fact that the occupation certificate was obtained by the company as all aspects necessary for executing the project had been left to the managing partners; (k) the question of contribution of capital did not affect the grant of registration as no time limit was set for such contribution in the partnership deed dated 19th May, 1969, and the accounts of the firm did show that capital contributions were made subsequently; and (1) the objection that the land was not transferred to the firm was also not valid as value of the land had been brought into the books as a business asset of the firm by the partners and in the light of the decision of the Supreme Court in Addanki Narayanappa & Anr. v. Bhaskara Krishnappa it became the property of the firm.

6. The Tribunal having declined Revenue's request for reference, on being moved under Section 256(2) of the Act, as noted above, reference on the questions set out above was directed by this Court. Hence this reference.

7. We have heard Mr. R.C.Pandey, learned senior standing counsel for the Revenue and Mr. P.V.Kapur, learned senior counsel for the assessed.

8. Learned counsel for Revenue, while supporting the refusal of registration by the Income-tax Officer and the First Appellate Authority, contended that no valid partnership in law had come into existence, inasmuch as facts found by the said authorities demonstrate that the entire business of construction of flats was carried on by the company; there was no element of partnership and that there was no element of mutual agency. Additionally, it was also contended that all the terms of the deed of partnership were not strictly complied with, particularly the clause pertaining to capital contribution by the parties.

9. On the other hand, learned senior counsel -for the assessed urged that the view of the Income-tax Officer and the AAC that no valid partnership in law had come into existence for lack of mutual agency because the business of the firm had been left in the hands of Smt. Raj Mohini Suri and the company, was based on misconception of Section 4 of the Partnership Act. Relying on K.D.Kamath's case (supra), it is submitted that vesting of control and management with two partners cannot affect the validity of the firm. On the aspect whether a genuine firm had in fact come into existence or not, learned counsel contended that the Tribunal, after due consideration of all the relevant factors, has recorded a clear finding that a firm valid in law and on facts had come into existence. It is asserted that the afore-extracted findings of the Tribunal are pure findings of fact and no material has been brought on record by the Revenue warranting interference by this Court in the exercise of its advisory jurisdiction.

10. Special provisions applicable to the "firms", as they existed prior to 1st April, 1993, are contained in Chapter XVI of the Act. Section 184 of the Act lays down the procedure regarding registration of firms. The relevant Income-tax Rules lay down details of the procedure for making an application for registration of a firm as contemplated under Section 184. Since, in the instant case, there is no controversy that the application had been made by the assessed in accordance with Section 184 of the Act, it is unnecessary for us to go deeper into these procedural provisions.

11. Section 4 of the Partnership Act, 1932 defines "partnership" as a relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all". According to Section 6 in determining whether a group of persons is or is not a firm or whether a person is or is not a partner in a firm, regard must be had to the real relation between parties as shown by all relevant facts taken together. Section 11(1) provides that subject to the provisions of the Act, the mutual rights and duties of the partners of a firm may be determined by contract between partners and such a contract may be expressed or implied by a course of dealing. It further provides that such contract may be varied by consent of all the partners and such consent may be expressed or implied again by a course of dealing. Section 12 deals with the rights and duties of a partner. But that again is subject to contract between the partners. Section 18 provides that, subject to the provisions of the Act, a partner is the agent of the firm for the purpose of the business of the firm. It also provides that subject to the provisions of Section 22, the act of a partner, which is done to carry on in the usual way the business of the kind carried on by the firm, binds the firm.

12. The principle of law in the matter of grant of registration to a firm under the Act was laid down by the Apex Court in K.D.Kamath's case (supra). Making a reference to the aforenoted provisions of the Partnership Act, it was emphasised that the legal requirements under Section 4 of the Partnership Act, to constitute a partnership in law, are : (1) there must be an agreement to share the profits or losses of the business; and (2) the business must be carried on by all the partners or any of them acting for all. There is implicit in the second requirement the principle of agency. The Court further observed that the fact that exclusive power and control, by agreement of the parties, is vested in one partner, is not destructive of the theory of partnership, provided the said two essential conditions are satisfied.

13. In S.P.Gramophone Co. v. CIT, Patiala (1986) 158 ITR 313, elaborating the same issue, the Supreme Court observed thus:

".......the concept of a firm being valid in law is distinct from its factual genuineness and for the purpose of granting registration, both the aspects are relevant and must be present and one without the other will be insufficient. In other words, even if a firm brought into existence by executing an instrument of partnership deed is shown to possess all the legal attributes, it would be open to the taxing authority to refuse registration if it were satisfied that no genuine firm has been constituted."

14. In the instant case, the assessed firm was brought into existence by virtue of an instrument of partnership deed dated 19th May, 1969, which admittedly contains all the requisite legal attributes. Therefore, the real question for consideration is whether or not factually a genuine firm had come into existence as a result of the execution of the said instrument. Ordinarily, the expression "genuine firm" means that a firm is really in existence and the partners carry on the business of the firm in accordance with the terms of the deed of partnership. It is not sham or bogus or some one is not a benami of somebody else, which is not the Revenue's here. The main objection of the Revenue in this behalf, as evidenced by the format of the second and third question set out above, is that omission of certain persons who were partners to the agreement dated 27th March, 1969 in the two deeds of partnership and the companies conduct in projecting itself as the vendor in the agreements with the prospective buyers was destructive of the basic concept of mutual agency as the company was only acting for self and not on behalf of the firm for all the partners.

15. It is no doubt true that two of the co-owners of the plot namely., Smt. Kanta Devi and Smt. Shanti Devi did not join the firm but the Tribunal has found the release deed executed by them to be a genuine document. We do not find any material on record to disagree with the Tribunal on this finding, which is one of fact. It is also not in dispute that the agreements with the prospective buyers were executed by the company but this fact, in our view, will not per se be sufficient to hold that there is lack of element of mutual agency. Clause 7 of the deed of partnership vests the control and management of the affairs of the firm in Smt. Raj Mohini Suri, who belonged to the builder promoter group, and the company. Both of them were to maintain all accounts of the partnership business. Here again the tribunal has found that there is no allegation that proper accounts for the firm's business were not maintained. We are satisfied that even though vast powers were given to Smt. Raj Mohini Suri and the company to manage the firm's business, the business was being carried on by them on behalf of all the partners. As a matter of fact, while dealing with the charge against the assessed that condition in the partnership deed relating to maintenance of accounts had been violated, the Tribunal observed that while completing assessment for the relevant assessment year on the assessed as un-registered firm, the Income-tax Officer had accepted the income returned by the assessed. We notice that while coming to the conclusion that a genuine firm had come into existence, the Tribunal had specifically dealt with all points raised by the lower authorities, reproduced above. The Tribunal has not found any merit in the factors taken into consideration by the Income-tax Officer and the AAC for holding that the assessed was not entitled to registration. Having regard to various clauses in the deed of partnership dated 19th May, 1969 and the manner in which the business of the assessed was carried on by the managing partners, the Tribunal has come to the conclusion that a genuine firm has come into existence. Whether a firm is genuine or not is a pure question of fact. It is for the Assessing Officer in the first instance and the Tribunal, as a final fact finding authority, to reach a final finding on this question [See: Ratanchand Darbarilal v. CIT, M.P. (1985) 155 ITR 720]. We are of the opinion that the Tribunal, while coming to the conclusion that a genuine firm has come into existence, has taken into consideration all material factors and the principle of law laid down in K.D.Kamath's and S.P.Gramophone's cases (supra). We are in agreement with the Tribunal that all the essential conditions necessary to form a relationship of partners are present in the instant case and the assessed firm is entitled to registration under the Act.

16. For the foregoing reasons, we answer all the questions referred to us in the affirmative i.e. in favor of the assessed and against the Revenue. There will, however, be no order as to costs.