1. P. VENKATARAMA REDDI, J.---In this reference case, the following questions have been referred by the Income-tax Appellate Tribunal for the opinion of this Court, at the instance of the Commissioner of Income-tax, Andhra Pradesh-III.
2. "(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal should have held that since the agreement, dated April 1, 1980, was entered into not for doing business but only to facilitate transfer of the house property held by the firm formed under the deed of partnership, dated June 8, 1979, to the limited company with a view to avoid payment of capital gains tax, the assessee is not entitled to registration under section 185(1)(a) of the Income Tax Act, 1961, for the assessment year 1981-82?
(2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal should have observed that the so-called new firm which came into existence on April 1, 1980, had not carried on any business either during the year of account or in the subsequent accounting year and hence it cannot be said that there was 'lull" in the business only in the accounting year relevant to the assesssm ent year 1981-82?
(3) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal should have held that by the deed, dated April. 1, 1980, no new firm legally constituted had come into being and the partnership firm constituted under the deed of partnership, dated June 8, 1979, continued to exist even during the accounting year relevant to the assessment year 1981-82?"
3. The respondent-firm came into existence as per the partnership deed, dated June 8, 1979, with five partners with the object of carrying on the business of trading in cotton, kapas, ginning, building construction, etc. It was subjected to assessment as a registered firm for the assessment year 1980-81. For the assessm ent year 1931-82, the respondent applied for registration in Form No. 11A, enclosing the new partnership deed, dated April 1, 1980. As per the said partnership deed, a private limited company by name, "Tirumalai Hotels & Builders (Pvt.) Ltd." was admitted as a partner with effect from April 1, 1980, and it was given 60 per cc t. Share. Inter alia, it was mentioned in the partnership deed that the said private limited company was incorporated with the object of taking over the business and assets and liability of the firm. It is also stated in clause (15) that "the partnership business may be transferred to the private limited company "Tirumalai Hotels & Builders (Private) Limited". The reconstituted firm was dissolved by a deed, dated November 11, 1980, i.e., shortly after the accounting year was over and the entire business was taken over by the private limited company and the erstwhile partners were given equity shares. Thereafter, the private limited company continued to carry on the same business. During the assessment year in question, admittedly, the firm did not carry on the business excepting letting out the building owned by the firm for rent. The assessing . Authority refused the registration for the assessment year 1981-82 on the ground that no business was carried on during the year and that the object of entering into partnership with the private limited company and reconstituting the firm was only to enable the assets to be transferred from one entity to another. The Inspecting Assistant Commissioner, therefore, came to the conclusion that there was no genuine firm in existence.
4. Hence, the registration was refused. On appeal, the Commissioner of Income-tax (Appeals) reversed the order of the Inspecting Assistant Commissioner and held that the firm was eligible for registration for the assessm ent year 1981-82 and, therefore, allowed the appeal. On further appeal by the Revenue, the Appellate Tribunal confirmed the order of the Commissioner of Income-tax (Appeals). The Tribunal went a step further and held that the reconstitution of the firm with the induction of the private limited company was for the purpose of promotion of business. The mere fact that there was no active business during the relevant year was held to be an immaterial factor. Though notice was served on the assessee, none appears for the respondent-assessee. We have, therefore, requested Mr. S. Ravi to assist us.
5. Mr. J.V. Prasad, learned standing counsel for the Department with certain degree of justification, placed heavy reliance on the findings of the primary authority (Inspecting Assistant Commissioner) and relied on a catena of decision in which it was laid down that carrying on the business by the partners is a pre-condition for registration. This requirement is not satisfied in the instant case. There was no business at all during the previous year and, in fact there was no intention to carry on the business according to learned standing counsel. The appellate authority's order is described as perverse.
6. The following facts are noted by the appellate authority:
(1) The assessee-firm carried on business in cotton in the preceding year;
(2) During the previous. Year relevant to the assessment year 1981-82, the firm derived the income only from letting out the immovable property.
(3) There was only a change in the constitution of the firm and the same firm which had previously five partners, continued the business with an additional partner....
(4) The line of business mentioned in the partnership deed, dated April 1, 1980, was the same as that carried on earlier. It was nowhere mentioned that the partnership business should be handed over to the private limited company during the relevant year..
(5) The assessee-firm was not dissolved during the previous year ending on November 7, 1980, relevant to the assessm ent year 1981-82. But, the actual dissolution took place only in the subsequent year. The fact that the firm was dissolved on November 7, 1980, cannot be a ground for denying registration for the assessm ent year 1981-82.
(6) (7) (6) The Inspecting Assistant Commissioner had not shown that any of the five partners did not represent a genuine entity and the genuineness of the firm cannot be doubted merely because a company was admitted as a partner, may be with a view to facilitate the ultimate takeover of the business.
(7) The fact that the business was kept in abeyance during the previous year relevant to the assessm ent year or that income was not derived, are not material factors.
7. The Tribunal held: "In the circumstances, we agree with the Commissioner (Appeals) that there was, in existence, a genuine firm with the constitution as specified in the partnership deed."
8. On the basis of the above facts, the conclusion reached by the Appellate Commissioner as well as the Appellate Tribunal is more in the nature of a finding of fact. Though it is possible that on the same set of facts a different view could be taken, while disposing of the reference case, it is not proper for the High Court to disturb the finding of fact. We cannot say that the finding of fact is wholly without basis or falls within the parameters of perversity in approach. There is some force in the contention of learned standing counsel that the factum of not carrying on business during the relevant year must be viewed in the context of the decision of the partners to make over the assets and liabilities and the going business to the private limited company. But, the fact that the business was in fact not carried on is not conclusive, nor the fact that the dissolution did take place in the next year, in conclusive. On an overall view of the matter, we hold that the conclusion reached by the Appellate Commissioner and the Tribunal is essentially a finding of fact backed up by some basis. It is not, therefore, possible to upset that finding.
9. The induction of a new partner with the objed of ultimate transfer of assets, etc., to another entity is not inconsistent with the recital in the partnership deed of the firm that it will carry on the business in cotton, etc., as before. There is no positive finding by the primary authority that there was no intention at all to carry on the business during the relevant year and that the recital in the deed was merely fictitious. The main stress was on the fact that the business was not actually carried on, and the firm was dissolved soon after the assessment year 1981-82. These factors are no doubt relevant, but not clinching. That is why we are inclined not to disturb the finding of fact arrived at by the Appellate Commissioner and the Tribunal.
10. Learned standing counsel, Mr. Prasad, relied upon a decision in Sudar Shan & Co. v. CIT (1973) 89 ITR 85, 87 (Mys). It was observed therein that the question whether a firm has legal existence has to be tested under the provisions of the Partnership Act. It was further observed that "the actual existence of a business carried on by the partners is essential to constitute a partnership". That was a case in which the business as contemplated in the deed of partnership was not commenced at all and the assessee invested the monies received from the partners with another firm. The facts herein are materially different. We cannot understand the observations of the Mysore High Court as laying down the law that the partnership business must actually be carried on during the previous year relevant to the assessm ent year in order to entitle the firm for registration.
11. The next decision relied upon by learned standing counsel for the Department is CIT v. Kuya and Khas Kuya Colliery Co. (1985) 156 ITR 206 (Patna). In that case, it was observed that the firm can be registered only if there is an existing partnership and if the firm is not carrying on business, it cannot be a partnership. Here again, we must point out that those observations were made in the context of facts of that case. The assessee-firm which was a firm having the object of mining coal, leased out the colliery and as per the agreement, the entire business was to be controlled by the lessee. The transaction did not involve the lease of commercial asset only, but it was a lease of the entire business. The assessee after executing the lease, completely effaced itself from the control of the colliery and the business of selling coal. It was, therefore, held that the, firm was not entitle& to registration.
12. In the light of the above discussion, we are inclined to answer the question in favour of the assessee and against the Revenue. The R.C. Is accordingly disposed of. .