Shardaben Rasiklal Acharya and Others vs Commissioner of Income Tax

D.A. Mehta, J.—The Tribunal, Ahmedabad Bench-''B'', has referred the following two questions for the opinion of this Court, at the instance of the assessee, u/s 256(1) of the IT Act 1961 (the Act):

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the business of Hotel Surat belonged to the partnership firm and not to the assessee as proprietor?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the dissolution deed dt. 19th Jan., 1990 was not a lawful, valid and bona fide dissolution deed and assessee concocted the evidence by allegedly executing the deed of dissolution with an ulterior motive to defraud the Revenue?

The assessment year is 1991-92 and the relevant accounting period is financial year ended on 31st March, 1991. One Dr. Rasiklal T. Acharya (since deceased) filed return of income on 31st Aug., 1991 declaring total loss of Rs. 1,36,398. As against''that, the assessment was finalised at a total income of Rs. 12,31,427 vide assessment order dt. 25th March, 1994 made u/s 143(3) of the Act.

In the statement of income accompanying the return of income, the deceased had claimed.loss of Rs. 2,20,402 stated to have arisen from alleged proprietary business of running a hotel by the name of "Hotel Surat". The AO disallowed the said loss and also disallowed the claim of depreciation in relation to business of Hotel Surat by holding that the said business was not a proprietary business but a partnership business. The partnership was, according to the AO, constituted by the deceased and his wife, Smt. Shardaben R. Acharya having 50 per cent share each. According to the AO, the business of the partnership was claimed to be proprietary business so as to enable the deceased assessee to claim set off of the said loss against the disclosure of Rs. 10 lacs made pursuant to the search and seizure proceedings carried out on 6th Dec, 1990. It was held by the AO that the ulterior motive behind creating the picture of dissolution of the firm was only for the purpose of defrauding the Revenue.

The deceased carried the matter in appeal before the CIT(A) who vide order dt. 15th Feb., 1995 upheld the order made by the AO and confirmed that the business of Hotel Surat was a business of the partnership and not a proprietary business.

The assessee carried the matter in second appeal before the Tribunal, who has confirmed the assessment order and the order of CIT(A) by recording as under:

We have considered the rival submissions and perused the facts on record. We find that both the assessee and his wife are doctor by profession and are highly qualified persons. During the course of search operations they spontaneously submitted that they were partners in the business styled as M/s Hotel Surat with 50 per cent share each. The relevant portions from their statements reproduced supra show that they submitted without any pressure and/or coercion. If the partnership had been dissolved by dissolution deed dt. 19th Jan., 1990 they would have brought this vital information to the notice of the authorised office who recorded their statements during the course of search operations. Another interesting feature is that during the course of search no dissolution deed was found and this further gives credence to the belief that the dissolution deed was an after-thought to get adjustment of the loss against the disclosure of Rs. 10 lacs made by the assessee during the course of search. Further, it is noted that no entries were passed in the books of accounts as a result of the so-called dissolution deed. No intimation was sent to the Registrar of the Firms and to the bank regarding the dissolution of the firm. It is now well settled that taxing authorities are entitled to look into surrounding circumstances to find out the readity of documents relied upon by the assessee- Commissioner of Income Tax, West Bengal II Vs. Durga Prasad More, . Taking into consideration surrounding circumstances and the totality of the facts of the case it can be inferred that the dissolution deed dt. 19th Jan., 1990 was an after-thought and fabricated piece of evidence to be used for the purpose of getting adjustment of loss of Hotel Surat against other income of the assessee. A cursory look on the alleged dissolution deed reveals that it was executed without giving any solid reasons for the dissolving of the partnership firm. It simply states ''as on this date 19th Jan., 1990 and now onwards this partnership will be considered dissolved, and the firm''s entire business will be taken care by our partner, Dr. Rasiklal Tulsidas Acharya.'' Nowhere it has been mentioned whether retiring partner (Smt. Shardaben) got anything on the dissolution of the firm Hotel Surat. It is not doubt witnessed by two witnesses but their addresses are not given. One witness is K.C. Rajput and the other witness has imply affixed illegible signature. Obviously the deed was rushed through in a hurry with an ulterior motive and cannot be accepted as a valid piece of evidence, more so in the face of categorical and spontaneous statements of the assessee and his wife recorded during the course of search operations.

Further, as stated above, no effect was given to the terms of the alleged deed of dissolution as no entries were passed in the books of accounts; and no intimation of the dissolution was sent to the Registrar of Firms and the bank. Reliance placed by the learned Counsel for the assessee on the hotel licence from Surat Municipal Corporation showing the assessee as sole proprietor and the certificate from the Police Commr. for commencement of hotel again showing the assessee as a sole proprietor is of no significance because the first document is dt. 1st Jan., 1988 and the second document is dt. 17th Oct., 1988 when the Hotel Surat was a partnership concern and accordingly the stand now taken is self-contradictory.

As regards the contention of the learned Counsel that the wife of the assessee was not well as her brother was admitted in the hospital on that day and reliance placed on the decision in the case of Smt. Sushiladevi Agarwal''s case (supra) carries no merit. In Sushiladevi Agarwal''s case (supra), the assessee was an illiterate, aged, rusti ''domestic and tradition bound Marwadi lady'', whereas in the case of present assessee his wife was highly qualified/educated and doctor by profession.

When the reference was listed for hearing, initially time was sought on behalf of applicant assessee for bringing legal heirs on record. Accordingly, Civil Appln. No. 30 of 2008 for bringing heirs on record was permitted to be circulated by making the following order on 26th Feb., 2008:

To be circulated along with civil application that may be filed by the applicant for bringing legal heirs of the applicant on record. The application shall be filed on or before 29th Feb., 2008.

Thereafter, on 3rd March, 2008, civil application for impleading legal heirs of the deceased assessee was allowed in the following terms:

This application seeks permission to bring on record legal heirs of deceased Dr. Rasiklal T. Acharya, who is the applicant in IT Ref. No. 21 of 1997.

Heard the learned advocates for the respective parties. The application is allowed. Cause title of IT Ref. No. 21 of 1997 to be amended on or before 4th March, 2008. Main matter to be listed for hearing on 5th March, 2008. The application stands allowed accordingly.

Mr S.N. Soparkar learned senior advocate appearing on behalf of the applicant-assessee submitted that before holding the dissolution deed to be a non-genuine document, no attempt was made by any authority to examine either the signatories to the document or the witnesses on the aspect of the document being back-dated or concocted. Secondly, the assessee had filed a return of income declaring total loss of Rs. 1,36,398 against whicri, assessment had been framed at a figure of Rs. 12,31,427 and, therefore, it was wrongly assumed that dissolution deed had been got up to seek set off of loss of Rs. 22,000 and odd amount against disclosed income of Rs. 10 lacs. The next submission was that merely because relevant entries had not been made in the books of accounts there was no dissolution was an incorrect inference in law, there being no such proposition in law. Lastly, it was contended that so far as the bank authorities are concerned, the account was being operated as a proprietary account right from inception as was evident from communication dt. 14th Aug., 1989 appearing at page No. 76 of the paper book. It was, therefore, urged that the order of the Tribunal suffers from vice of perversity and was required to be reversed.

Heard Mr. M.R. Bhatt learned senior standing Counsel for the respondent-Revenue. It was submitted that the order of the Tribunal, in fact, does not give rise to any question of law. That the questions referred by the Tribunal merely refer to the aspects of appreciation of evidence and findings of fact and in absence of any question relating to perversity of the findings, no interference is called for.

The Tribunal has, from the extract reproduced hereinbefore recorded findings of fact after appreciating the evidence on record. The facts are not in dispute. Search and seizure proceedings took place at the residential premises of the deceased assessee as well as the premises of Hotel Surat. Statements of both the deceased assessee and his wife were recorded during the course of proceedings u/s 132 of the Act. The relevant extract from the statement of deceased assessee as reproduced by the Tribunal, reads as under:

Q.18 : How much you have invested in the hotel business?

Ans. In my hotel business I have invested about Rs. 30 lacs.

Q.19 : In the partnership business of Hotel Surat who are the other partners and what is their share?

Ans. In Hotel Surat, I and my wife Shardaben are partners and our share is 50-50.

Similarly, relevant extract of the statement of wife of the deceased assessee as reproduced by the Tribunal, reads as under:

Q.6 : State the sources of your income?

Ans. 1. I get Rs. 1,500 annually as salary in Surat Safe Deposit Vault.

I am a partner in Acharya Hospital, Galemandi, Surat.

I am a partner in Hotel Surat, Galemandi Acharya Hospital building which is converted from 17th March, 1990 into guest-house by converting 34 rooms in Acharya Building and there are seven to eight rooms in upper storey. I have left medical practice for last five to six years.

On a plain reading of the aforesaid statements made by both deceased assessee and his wife, it becomes apparent that both of them were ad idem with each other that one of them was a partner in the partnership firm which conducted the business of Hotel Surat. The subsequent explanation by the deceased assessee that the statement of the wife was rendered in the circumstances of brother of the lady being. unwell and hence not being mentally focussed, does not merit acceptance as rightly recorded by the Tribunal because the lady is an educated person, a qualified doctor. Moreover, even the deceased assessee, who claimed that the partnership was dissolved w.e.f. 19th Jan., 1990, stated that he was having 50 per cent share in the partnership of M/s Hotel Surat. Therefore, even if the statement of the lady is discounted, there is no explanation as to why the deceased assessee also stated that the business was run by the partnership firm. Admittedly, there is no retraction from the statement by either one of them.

On behalf of the assessee emphatic reliance was placed on two certificates, one dt. 1st Oct., 1988 issued by the Surat Municipal Corporation and another dt. 13th Sept., 1988 (wrongly mentioned as 17th Oct., 1988) issued by the Police Commr., Surat, to contend that as both the certificates mention only the name of deceased assessee the said documents would support the case of the assessee that the business of the hotel was a proprietary business. This contention also does not merit acceptance because vide letter dt. 29th March, 1992 the deceased assessee himself accepted before the AO that a partnership had in fact come into existence on 15th July, 1988, wherein, the deceased assessee and his wife each were having 50 per cent share in the partnership firm.

The only question that thereafter survives is whether the dissolution deed stated to have been executed on 18th Jan., 1990, on the assumption that the said document was a valid document, was acted upon. All the authorities have concurrently found that the accounts of the firm were not made up, balances on the date of dissolution were not struck, the bank from whom loan was obtained by the partnership was not informed about the so-called dissolution, and lastly, the Registrar of Firms with whom the firm has been registered, was not intimated about the so-called dissolution. The letter dt. 14th Aug., 1989 referred to and relied upon by the learned senior advocate cannot assist the assessee. Firstly, the said letter has not even been shown to have been relied upon on behalf of the assessee before any of the authorities, or the Tribunal: Secondly, and more importantly, the assessee never denied existence of the partnership entered into on 15th. July, 1988; the only case was, such partnership was dissolved vide dissolution deed dt. 18th Jan., 1990. If that was a correct statement there would be no occasion for the letter dt. 14th Aug., 1989. The said letter does not inspire confidence. In absence of any cogent and convincing evidence to dislodge the aforesaid findings of fact, which are not even disputed, it is not possible to take a different view of the matter and the findings recorded by the Tribunal merit acceptance.

In the aforesaid set of facts and circumstances of the case, the Tribunal was right in law in holding that the business of Hotel Surat belongs to the partnership firm and is not a proprietary business; that the dissolution deed dt. 19th Jan., 1990 was not a valid deed. Accordingly, both the questions are answered In the affirmative, i.e., in favour of the Revenue and against the assessee.

The reference stands disposed of accordingly with no order as to costs.