SRINIVASA RAO C Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) : This reference made by the Tribunal, Madras, under s. 66(1) of the Indian IT Act, 1922, arises out of two applications presented under s. 26A of the Act for renewal of registration of the assessee- firm. The firm consisted of four partners and was constituted under an instrument of partnership executed on 10th Dec., 1957. There was a registration of there firm under s. 26A for the asst. yrs. 1958-59 and 1959-60. But renewal of registration for the succeeding two years was refused by the ITO on the ground that appropriation of profits had been made otherwise than in accordance with the instrument of partnership. The AAC, to whom the assessee appealed, concurred in the view taken by the ITO and the further appeal to the Tribunal was also dismissed. The question of law referred to us for our decision, on the application of the assessee, reads :

(2.) IN the applications presented for renewal of registration in accordance with the form prescribed by r. 6 of the INdian IT Rules, 1922, it was stated by the assessee that, although the four partners were during the relevant period entitled to a four annas share each, in the balance of the profits or the losses, two of the partners had been paid salaries during that period. One of them, Raghunath Rao, it was stated, was paid a salary of Rs. 3,600 and the other, Dattatreya, was paid a salary of Rs. 1,800 during each previous year. The instrument of partnership did not, in so many words, provide for the payment of any salary to any of the partners. The ITO was of the opinion that, since the instrument of partnership was not suitably altered so as to provide for payment of salary, the constitution of the firm during the relevant period was not the same as what it was, during the earlier periods, under the instrument of partnership.

(3.) THE principal reason for which the Tribunal reached the conclusion that the renewal of registration was properly refused was that there was an alteration in the constitution of the firm in consequence of the variation in the porfit-sharing proportion resulting from the payment of a salary for which the instrument of partnership contained no provision. From the statement of the case what is clear is that the Tribunal did not think that the firm was a bogus firm or that a partnership was not created under the instrument of partnership when it was initially registered. So, the question before us is whether there was a change in the constitution of the firm such as the one to which the Tribunal 73 had alluded and whether the payment of a salary to two partners altered the constitution of the firm in that way.