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1979 Supreme(Mad) 303
High Court of Judicature at Madras
THE HONOURABLE MR. JUSTICE SETHURAMAN & THE HONOURABLE MR. JUSTICE BALASUBRAMANYAN
Commissioner of Income Tax, Tamil Nadu I - Appellant
Versus
S. S.A.M.Shanmugha Nadar Financing Corporation - Respondent
Case No : No
Decided On : 10 July 1979
A firm cannot be registered as a genuine entity unless it was genuinely brought into existence and it, actually carried on business.
Headnote:
INCOME TAX - Registration of firm - Genuineness of firm - Whether the firm was entitled to registration - Whether the Tribunal's finding that there was a genuine firm in existence was based on relevant and valid materials - Whether the interest paid to the firm was allowable as deduction.
Fact of the Case:
The assessee, a firm known as M/s. S.S.A.M. Shanmugha Nadar Financing Corporation, Tuticorin, and another firm called M/s. S.S.A.M. Shanmugha Nadar, were denied registration for the assessment years 1972-73 and 1973-74 by the Income Tax Officer (ITO). The assessee appealed to the Appellate Assistant Commissioner (AAC), who allowed the registration. The department appealed to the Tribunal, which confirmed the AAC's order. The Commissioner of Income-tax, Madras, obtained references of the questions to the High Court.
Finding of the Court:
The High Court held that the Tribunal's finding that there was a genuine firm in existence was not based on relevant and valid materials. The Court found that the firm was not a genuine entity and that it had not carried on any business. The Court also held that the interest paid to the firm was not allowable as deduction.
Issues: 1. Whether the assessee-firm was entitled to the grant of registration for the assessment year 1972-73? 2. Whether the Tribunal was right in holding that there is no material to treat the transaction as a collusive transaction? 3. Whether the Tribunal was right in holding that the new firm, constituted by the wives of the eight partners of the assessee-firm with another partner of the assessee-firm, is a genuine firm? 4. Whether the Tribunal was right in holding that the sum of Rs. 42, 027 was paid to the genuine firm, and, therefore, not liable to be added in the assessment of the assessee for the year 1972-73? 5. Whether the Appellate Tribunal's finding that there was a genuine firm in existence during the accounting year relevant for the assessment year 1973-74, is based on relevant and valid materials and is a reasonable view to take on the facts of the case?
Ratio Decidendi: The High Court held that the Tribunal's finding that there was a genuine firm in existence was not based on relevant and valid materials. The Court found that the firm was not a genuine entity and that it had not carried on any business. The Court also held that the interest paid to the firm was not allowable as deduction.
Final Decision: The High Court answered the questions referred to in T.C. No. 249 of 1975 and T C. No. 485 of 1978 in the affirmative and in favour of the Revenue. The Court answered the questions referred in T.C. Nos. 809 of 1977 and 484 of 1978 in the negative and in favour of the Revenue.
SETHURAMAN J.
These references have been made at the instance of the Commissioner of Income-tax, Madras, in the case of a firm known as M/s. S.S.A.M. Shanmugha Nadar Financing Corporation, Tuticorin, and another firm called M/s. S.S.A.M. Shanmugha Nadar. The assessment years under reference are 1972-73 and 1973-74. In T.C. No. 249 of 1975, the question referred is :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee-firm was entitled to the grant of registration for the assessment year 1972-73 ?" *
In T.C. No. 485 of 1978, in relation to the assessment year 1973-74, the questions referred are as follows
"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that there is no material to treat the transaction as a collusive transaction ?
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the new firm, constituted by the wives of the eight partners of the assessee-firm with another partner of the assessee-firm, is a genuine firm ?" *
The other two references, viz., T.C. Nos. 809 of 1977 and 484 of 1978, relate to the allowability of the interest paid to what may be conveniently called hereafter as the Financing Corporation. In T.C. No. 809 of 1977, the question referred is
"Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the sum of Rs. 42, 027 was paid to the genuine firm, and, therefore, not liable to be added in the assessment of the assessee for the year 1972-73?"
In T.C. No. 484 of 1978, the following questions are referred
"(1) Whether, on the facts and in the circumstances of the case, it has been rightly held by the Tribunal that the assessee was entitled to registration under section 185 of the Income-tax Act, 1961 ?(2) Whether the Appellate Tribunal's finding that there was a genuine firm in existence during the accounting year relevant for the assessment year 1973-74, is based on relevant and valid materials and is a reasonable view to take on the facts of the case ?" *
If the firm of Financing Corporation is held to be a genuine entity entitled to registration, then the interest will have to be allowed as deduction. If the firm is not a genuine entity, the interest payment would not be allowable as deduction because it would not have been paid to any genuine entity or in other words not paid at all. Therefore, the question of the genuineness of the firm referred to as the Financing Corporation which has claimed registration for the two years is the first question to be decided and the answers to the rest of the questions depend on it
There was a firm by name S.S.A.M. Shanmugha Nadar consisting of nine individual male partners of whom Mr. S.S.A.M.S. Muthurajan is one. On 8th February, 1971, an instrument of partnership was executed with eight ladies and this S.S.A.M.S. Muthurajan as partners. The ladies are all the respective wives of the eight other partners of the firm, S.S.A.M. Shanmugha Nadar
The nine partners of the firm of Shanmugha Nadar had credit balances to their personal accounts and they were getting interest at the rate of 9% per annum on such credit balances. The eight ladies, who were the wives of the eight partners of the firm, S.S.A.M. Shanmugha Nadar had also credit balances in the same firm and they were being paid interest at the rate of 9% per annum. On 8th February, 1971, when the Financing Corporation is said to have come into existence, the eight ladies are shown to have withdrawn a sum of Rs. 1, 16, 309 which was to their credit from the firm of Shanmugha Nadar. The other person, Muthurajan, is also shown as having withdrawn a sum of Rs. 5, 000 from the credit balance in his favour. Thus, a sum of Rs. 1, 21, 309 was shown as withdrawn by the nine partners of the Financing Corporation from the firm of Shanmugha Nadar and introduced it as their capital in the f
