Judgment:
Commissioner was justified in invoking revision when assessing officer failed to apply his mind to trace the genuineness of claim where assesseewas said to be benamidar of minors.
The Commissioner recorded two reasons for invoking his powers under section 263. He clearly stated that the Income Tax Officer did not apply his mind to the claim of deduction made by the assessee in the statement accompanying the return of income. He is also of the view that the Income Tax Officer had not enquired into the factual genuineness and the legal validity of the claim. Further, in this case, it was alleged that real owners being minors are not competent to contract. This would mean that they cannot appoint the assessee as their benamidar. No doubt the amounts belonging to the minors are lying with the firm in their individual accounts and profits are credited to the accounts of the minors. That does not mean that consideration did proceed from the minors. Thus, the order of the Income Tax Officer suffered from an error which is prejudicial to the interests of the revenue and, therefore, the order of the Commissioner under section 263(1) was justified.
Per Shri G. Santhanm, Accountant Member - This is an appeal by the assessee against the order of the Commissioner under section 263(1) of the Income-tax Act, 1961 (the Act).
2. The assessee is a partner in International Fibre Sacks Co., Proddatur, holding 36 per cent share in the said firm. Clause 14 of the partnership deed dated 6-8-1979 provided as follows : "In this partnership firm party of the second part Mr. Sankaraiah is the nominee as detailed below : For 9/36th of his share he is the nominee of minor Juturu Guru Rajesh son of Krishnamurthy of Proddatur.
For 9/36th of his share he is the nominee of Juturu Dinendra son of Krishnamurthy of proddatur.
For 9/36th of his share, he is the nominee of minor Juturu Subhalakshmi daughter of Krishnamurthy of Proddatur.
9/36th of his share belongs to party of the second part in his individual capacity." In this appeal, we are concerned with Shri Juturu Sankaraiah, party of the second part, who is said to be a nominee of two minor sons and a minor daughter of Krishnamurthy, Proddatur, to the extent of 9/36th share in each case. The firm was granted registration. The original assessment was made in the case of the assessee on 27-6-1981 in which the share of income from the partnership firm of International Fibre Sacks Co. was taken at Rs. 14,392 being one-fourth of 36 per cent share in the firm. The assessment was completed under section 143(1) of the Act. The Commissioner exercising his jurisdiction under section 263(1) was of the view that as per the firms assessment order dated 24-8-1981, a sum of Rs. 57,560 being 36 per cent share in the profits of the firm was apportioned to the assessee. But, in the assessment of the assessee, the share was taken only at Rs. 14,392 being one-fourth of 36 per cent. He also noticed that the assessee had clearly indicated in his return of income that out of 36 per cent share in the profits of the firm amounting to Rs. 42,495, a sum of Rs. 31,872 was deducted as being the share of profit referable to Juturu Guru Rajesh, Juturu Dinendra and Juturu Subhalakshmi, minor children of Shri Krishnamurthy of Proddatur. The Commissioner noticed that the assessment record did not indicate that the ITO applied his mind to the claim of deduction of Rs. 31,872 nor did he made enquiries regarding the validity of the claim and that assessment was made under section 143(1) on the basis of the assessees return without much thought being given to it. Therefore, the Commissioner was of the new that the order of the ITO suffered from an error and prejudice. Notice under section 263 dated 7-6-1983 was served on the assessee on 10-6-1983. The assessee objected to the proposals and contended that the ITO had taken note of paragraph 14 of the partnership deed and had allowed the deductions as claimed in favour of three minor children keeping in view the proviso to section 185(1) of the Act. It was also stated in that letter that the procedure adopted by the ITO is in accordance with law and there was enough evidence to pin-point the fact that the ITO had applied his mind before taking the income of the assessee at one-fourth of 36 per cent.
However, before the Commissioner, the assessees representative Shri N.L. Narasimha Rao is stated to have no objection to the proposal under section 263(1). This is recorded by the Commissioner in his order cited supra. Subsequently, on 21-6-1983, Shri Narasimha Rao wrote the Commissioner a letter withdrawing his consent, if any, that was given during the course of hearing of the case.
3. Before us, Shri Ch. Sreerama Rao, the learned counsel for the assessee, submitted that the order of the Commissioner under section 263(1) was not justified. All the materials were placed before the ITO in the course of the assessment of the firm; the partnership deed was also before him. The ITO scrutinised the case of the firm on several sittings and had gone into the genuineness of the firm before granting continuation of registration under section 185(1). He had gone into the provisions of the partnership deed, particularly clause 14 thereof, in which it was mentioned that Shri J. Krishnamurthy in respect of three-fourth of his share in the partnership. The partners have also informed the ITO about the benami relations of Shri J. Sankaraiah with the minor children of Shri Krishnamurthy and after considering the relevant materials, the ITO granted continuation of registration of the firm treating the firm as genuine for the purposes of the Act. The assessment of the partners is only a consequential one emanating from the assessment of the firm. The return of income disclosed that the assessee had specifically drawn the attention of the ITO that out of the 36 per cent share which he derived from the firm three-fourth belonged to the minor children of Shri Krishnamurthy explaining why the assessee had deducted the amount representing three-fourth of 36 per cent share in income statement. This was also before the ITO. He had accordingly accepted the contention of the assessee that he is a benamidar of the minor children of Shri Krishnamurthy in respect of three-fourth of 36 per cent share. It is not as if he had blindly accepted the return of the assessee even though the assessment was made under section 143(1). Therefore, he submitted that the Commissioners conclusion that the ITO had not applied his mind to the facts of the case or materials on record is not supported by evidence. In view of this, the Commissioner was not empowered to invoke the provisions of section 263(1). He submitted further that the assessees representative Shri N. L. Narasimha Rao is an octogenarian and he might have given his consent for the proposal under section 263(1) in a weak moment, but later on he had withdrawn his consent. Therefore, the consent initially given by a very old person in a weak moment, and that too before the Commissioner, should not be held against the assessee.
4. On merits, Shri Sreerama Rao submitted that it is the real income of the person which is to be assessed and not the notional or hypothetical income. It is true that in this context the income should be understood in accordance with income-tax law and not otherwise. The basis of the income for the assessee is from his membership in the partnership and that is witnessed by an instrument in writing duly approved by the income-tax authorities. Clause 14 of the partnership deed is very specific in that the assessee is a benamidar of Shri Krishnamurthys children and only one-fourth share of the 36 per cent in the hands of the assessee and the balance he had taxed in the respective hands of the minor children as the assessee was the benamindar of these persons.
This was in keeping with the decisions of the Supreme Court in CIT v.Sivakasi Match Exporting Co. [1964] 53 ITR 204 and Murlidhar Himatsingka v. CIT [1966] 62 ITR 323. He also submitted that the real income of the person alone should be assessed but not the notional income or hypothetical income and he relied on a number of authorities for this proposition. It was his plea that once the genuineness of the firm was established, the ITO is bound to give ef fect to the provisions of the partnership deed on the basis of which the genuineness of the firm was established for purposes of registration.
One of the clauses of the partnership deed spelt out benami relationship of the assessee with the minor children of Shri Krishnamurthy and the income of the assessee could only be computed in accordance with that particular provision in the partnership deed. The ITO had, therefore, rightly assessed only one-fourth share of 36 per cent of the profits of the firm in the hands of the assessee and, therefore, there was neither error nor prejudice caused to the revenue in such assessment. Before setting aside the order of the ITO, it is the duty of the Commissioner to establish that the order suffered from both error and prejudice. In this case, there was neither error no prejudice, and, therefore, even on merits, the Commissioners order cannot be sustained.
5. Shri Sreerama Rao submitted that nothing was suppressed from the ITO in the course of the assessment of the firm or in the assessment of the partner-assessee. It is not always necessary for the benami transactions to remain under ground; either the real owner or the benamidar could proclaim the benami relationship. In this case, the assessees benami relationship with the minor children of Shri Krishnamurthy to extend of three-fourth of 36 per cent share in the profit or loss of the firm has been incorporated in the partnership deed itself to which all partners have subscribed their names and signatures. This very partnership was before the ITO; other partners also vouchsafed for this in Form No. 12A filed with the ITO. The assessee had also disclosed to the minors that he is their benamidar for specified shares in the partnership deed and that the minors guardian had agreed to share their loss in case of loss in the firm. In fact, the accounts of the minors would show only profits. As a matter of fact, the minors were holding balances with the firm even before Shri J. Sankaraiah became partner in that firm. So, they are the real owners. In view of their agreeing to keep their funds with the firm, a large share waw allotted to the assessee who in turn parted with three-fourth of his share in favour of the minors as he was the benamidar in respect of such shares. There was nothing wrong in such an agreement being made. The minors received their profits in view of their funds lying with the firm. As they themselves cannot become full-fledged partners, the assessee agreed to act as their benamidar.
If any loss was sustained by the firm, the minorsguardian would share such loss. There is nothing wrong for guardian to enter into the partnership for the benefit of the minors. In such an event, the minor is not a partner, nor is he admitted to the benefits of the partnership. It is the guardian who is the partner first and last but the benefits would go to the minor and if there is any loss, the guardian will suffer such losses. In this case, instead of the guardian, the assessee had entered into the partnership as the benamidar of the minours and the loss, if any from the partnership would be to the account of the guardian of the minors. The share income of the firm should be assessed in the hands of the real partner.
Accordingly, the ITO took only one-fourth of 36 per cent of the profits of the firm in the hands of the assessee. It is perfectly valid under law and there was no error in such assessment and in the absence of any error in the initial assessment, there could be no prejudice and, therefore, the order of the Commissioner under section 263(1) cannot be sustained.
6. Shri P. Radhakrishna Murthy, for the department, submitted that the assessment records of the assessee did not disclose that the ITO had applied his mind to all the relevant facts on record. For purpose of granting registration or for continuation of registration, the ITO will have to make adequate enquiries regarding the genuineness of the firm.
Such enquiries were confined only to the ascertainment of genuineness of the firm. The partnership deed and other materials which were before the ITO might have enabled him to determine the genuineness of the firm and these cannot be extended to any further inferences. The assessment of the partners is separate. In this assessment, the ITO is bound to consider whether the assessee is the real owner of the share income obtained from the firm, in order to determine the real ownership of share income for purposes of assessment in the hands of the partner.
The ITO ought to have considered several factors such as : (i) in the case of minor who is incompetent to contract, any person other than the father and natural guardian could take upon himself the responsibility of being a benamidar of the minor, and (ii) whether any third party could act as a benamidar of the minor without the express consent of the father and natural guardian.
Merely by accepting the partnership deed for purposes of registration or continuation thereof, it cannot be said that the ITO had applied his mind to any of these aspects before he proceeded to assess the partners. Therefore, the Commissioner was right in invoking the provisions of section 263(1).
7. We have heard rival submissions and perused records. We have no hesitation in upholding the order of the Commissioner under section 263(1). The learned Commissioner had clearly recorded a finding in his order that the ITO did not apply his mind to the claim of deduction of Rs. 31,872 made by the appellant in the statement accompanying the return of income, nor did he made any enquiry into the factual genuineness or legal validity of the claim. Thus, the Commissioner had recorded reasons for invoking his jurisdiction under section 263(1).
Shri Sreerama Rao the learned counsel for the assessee, relied on the following decisions in support of his plea that the Commissioner lacked jurisdiction in the case of the assessee : J. P. Srivastava & Sons (Kanpur) Ltd. v. CIT (1978) 111 ITR 326 (All.), CIT v. R. K. Metal Works (1978) 112 ITR 445 (Punj. & Har.), CIT v. Shantilal Agarwalla (1983) 142 ITR 778 (Pat.) and CIT v. Chawla Truck House (1083) 139 ITR 182 (Punj & Har.).
In the first case, it is observed at page 329 that the Commissioner should examine the plea on merits. He could take action only when he rejected the plea of the assessee. In this case, the assessees representative Shri N. L. Nareasimha Rao attended the hearing before the Commissioner and it would appear that he had given his consent for the proposals made in the notice under section 263. It is equally true that subsequently Shri N. L. Narasimha Rao withdrew his consent by his letter dated 21-6-1983. However, on the date when the Commissioner passed the order under section 263(1), which us 20-6-1983, the consent had not been withdrawn and it was very much binding against the assessee. Therefore, we fail to see how the observations made in decision of the Allahabad High Court in J. P. Srivastava & Sons (Kanpur) Ltd.s case (supra) would come to the rescue of the assessee.
In the second case, it was held that in passing an order of revision under section 263, it is necessary for the Commissioner to state in what manner he considered that the order of the ITO was erroneous and prejudicial to the interests of the revenue and what the basis was for such a conclusion. In the fourth case, it was held that the Commissioner should indicate the materials for arriving at his conclusion. The assessees counsel relies on these decisions to attack the jurisdiction of the Commissioner.
8. On going through the Commissioners order, we notice that the Commissioner has recorded two reasons for invoking his powers under section 263. He had also clearly stated that the ITO had not applied his mind to the claim of deduction made by the assessee in the statement accompanying the return of income. He is also of the view that the ITO had not enquired into the factual genuineness and the legal validity of the claim. Thus, the Commissioner has stated not only the reasons for invoking section 263 but also the basis on which his reasons are founded. Thus, the conditions precedent for invoking the power under section 263 as explained in the above two decisions are satisfied in this case, 9. The third case relied on by the learned counsel for the assessee is with regard to the order passed by an ITO in contravention of section 124 of the Act, which the Commissioner sought to revise. It was also held in that case that merely because there has been contravention of provisions of section 124 it cannot be held that the Commissioner could exercise the power under section 263(1) unless he is also satisfied that the assessment order in question is prejudicial to the interests of revenue. Thus, the facts of this case are not on all fours with the facts of the case before us. In our opinion, these cases relied on by the assessee are more in favour of the revenue than in his favour. For these reasons, we uphold the order of the Commissioner in having set aside the order of the ITO.10. On merits also, the assessee should fail. He described himself as a benamidar of the minor children of Shri Krishnamurthy and such description is found in clause 14 of the partnership deed. No evidence has been let in by the assessee to whom that he is really a benamidar as claimed except the self-serving recital in the partnership deed. It was held in CIT v. Durga Prasad More (1971) 82 ITR 540 (SC), that though an apparent statement must be considered real until it was shown that there were reasons to believe that the apparent was not real, in a case where a party relied on self-serving recitals in documents, it was for that party to establish the truth of those recitals; the taxing authorities were entitled to look into the surrounding circumstances to find out the reality of such recitals. Therefore, the self-serving recitals in the partnership deed described Shri J. Sankaraiah as benamidar of Shri Krishnamurthys minor children to the extent specified therein should be independently prove by other evidence in order that these recitals may be relied upon. According to the assessee, the accounts of the minors children were credited with their aliquot share in the books of the firm and Shri J. Sankaraiahs account was credited only to the extent of one-fourth of 36 per cent of the profits of the firm. Thus, in our opinion, is only an accounting treatment of the profits of the firm attributable to 36 per cent share to which Shri J.Sankaraiah was entitled. This accounting treatment is in pursuance of clause 14 of the partnership deed. This cannot be considered as an independent piece of evidence which would establish the benami relationship of Shri J. Sankaraiah with the minor children of Shri Krishnamurthy. Even according to clause 14 of the partnership deed, Shri J. Sankaraiah is a benamidar of the minor children not only in respect of profits but also in respect of losses of the firm to the extent of three-fourth of 36 per cent share. Obviously, minor cannot share the loss of the firm according to section 30 of the Indian Partnership Act, 1932. In the event of loss, the million dollar question is who will share the loss - the minors, Shri J. Sankaraiah or the father and natural guardian In this context, Shri J. Sankaraiah Rao relies on the declaration made by Shri J. Sankaraiah to the effect that in the event of loss. This statement by the assessee is not worth the piece of paper on which it is written, because it purports to impose a liability on the father and natural guardian by a third party in case loss is sustained by the firm. Moreover, this is only a unilateral declaration. Obviously, minors, in view of their incapacity to contract, cannot, act on this declaration. Shri Krishnamurthy, who is the father and natural guardian of the minors, had not recorded his consent to the contents of the declaration. Whatever be the nature of the declaration, it cannot be enforced by the minors or by their father and natural guardian. It cannot be presumed that the father of the minor children will enforce the declaration, because in that case he will be saddled with the liability to share the loss of the minors in case loss is sustained by the firm. Therefore, we reject the arguments of the learned counsel that the recitals in clause 14 of the partnership deed are not self-serving recitals.
11. It is the contention of Shri Ch. Sreerama Rao that once the genuineness of the firm is established and registration is granted to the firm, the subsequent assessment of the partner should be only on the basis of the share income in terms of the partnership deed and in this context, he submitted that clauses 6 and 14 of the partnership deed should be read together. If a partner is only a benamidar for another, it can only mean that he is accountable to the real owner for the profits earned by him from and out of the partnership. Therefore, a benamidar is the real trustee of the real owner and he has no beneficial interest in the property or the business of the real owner but, in law, he can also enter into partnership with others. In our view, this proposition, which is a leaf taken from the decision of the Madras High Court in Aruna Group of Estates v. State of Madras (1965) 55 ITR 642, is relevant for deciding whether a partnership having a benamidar could be granted registration under the Act. The question of registration is not before us. We are concerned with the individual assessment of one of the partners who alleged that he is the benamidar or minor children of some other person. We have already indicated that a mere recital in the partnership deed is not positive proof to establish the benami character of the transaction or the relationship.
In law, there is no presumption of benami transaction. The onus is always on the person who alleges that the transaction is a benami one.
We have so held on a similar point in G. Venkatesham v. ITO (1986) 16 ITD 462 (Hyd.). In this case, it is not the department which alleges benami character of the transaction. It is rather the assessee himself who proclaims that he is the benamidar. Unless such proclamation is proved by cogent evidence, we are not inclined to accept such proclamation either on its face value especially when there is no presumption in law in favour of benami transactions.
12. In making the assessment of the partner, the ITO is not precluded from enquiring into the genuineness of the income accruing to the partner from his membership in the partnership. In the case relied on by the assessee in CIT v. A. Abdul Rahim & Co. (1965) 55 ITR 651 (SC) it was held that the beneficial interest in the income pertaining to the share of the said benamidar may have relevance to the matter of assessment but none in regard to the question of registration. This is exactly the point at issue before us. If the assessee is really the benamidar of some other persons, certainly he is entitled to be assessed in respect of his real share income. But, has it been proved by cogent evidence that the assessee, though a partner holding 36 per cent share in the profits and losses of the firm, is really a benamidar of the minor sons of Shri Krishnamurthy Apart from the self-serving recital in the partnership deed and crediting the share of profit to the accounts of the minor children, no other material has been brought on record to give positive proof of benami relationship. As far as self-serving recitals are concerned, the Supreme Court in the case of Durga Prasad More (supra) observed at page 545 that the taxing authorities were not required to put on blinkers while looking at the documents produced before them; they were entitled to look into the surroundings circumstances to find out the reality of the recitals made in those documents. The surrounding circumstances in this case are quite peculiar. In this assessment year, the assessee is said to be benamidar of minor children of Shri Krishnamurthy, and in the preceding year, some other person is stated to be benamidar of the same minor children of Shri Krishnamurthy in respect of the shares specified in the respective partnership deeds. Thus, one benamidar replaces another benamidar in respect of the same persons in similar transactions. Who authorised such a change of banamidar Obviously, the minor children cannot, because they are minors. Also, nothing is brought on record to show that at least the guardian of the minor children interfered and effected the change of banamidar.
13. Benami transaction presupposes at least two persons : one the real owner and another the ostensible owner. Always it is the real owner from whom consideration passes and profits or right to property is purchased in the name of the other person for whom the benefit is not intended. This is the essence of the benami transaction. In this case there is no entrustment of the monies of the minor to Shri J.Sankaraiah. Besides, the real owner must be a person who must have the capacity to contract or in case of incapacity to enter into contract, some other person must act on his behalf. In this case, it is alleged by the assessee that the real owner of three-fourth of 36 percent in the profits and losses of the firm are the minor children of Shri Krishnamurthy. In terms of section 11 of Indian Contract Act, 1872 : "Every person is competent to contract who is the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contraction by any law to which he is subject." Therefore, in this case, the alleged real owners being minors are not competent to contract. This would mean that they cannot appoint the assessee as their benamidar. The guardian of the alleged real owners who are minors is now where in the picture. He had not authorised the assessee to be the benamidar of his minor children, nor has he bound himself to bear the losses attributable to the minors in the event of loss in the firm. Nor did he entrust the founds of the minors to Shri J. Sankaraiah. The unilateral declaration made by the assessee cuts at the root of the case, because such unilateral declarations cannot be enforced either by the minors or by their guardian. In this view also, we hold that Shri J. Sankaraiah cannot be considered as benamidar of the minor children of Shri Krishnamurthy.
14. It was argued by Shri Sreerama Rao that the consideration has proceeded from the minors in that they have agreed to leave the amounts lying to their credit in the firm in which the assessee is a partner.
No doubt, the amounts belonging to the minors are lying with the firm in their individual accounts and profits are credited to the accounts of the minors. That does not mean that consideration did proceed from the minors for the sake of appointing the assessee as benamidar. The amounts were there with the firm already and the minors did not choose to withdraw the same. In the absence of evidence, we are unable to appreciate the link between the assessee becoming a benamidar and minor children leaving the amount with the firm.
15. It was submitted by Shri Sreerama Rao that at several stages of assessment the files of the partnership firm and of the assessee were scrutinised before the assessments were completed and, therefore, there was no error or prejudice, the existence of which alone would give rise to cause of action under section 263. It may be that the files were scrutinised several times at different stages, but mere scrutiny by several persons at different stages of assessment by itself would not lead to the inference that there could be no error or prejudice to the revenue. Obviously, the order of the ITO suffered from an error which is prejudicial to the interests of the revenue and, therefore, we uphold the order of the Commissioner under section 263(1).