COMMISSIONER OF INCOME TAX Vs. GNANAGIRI TRADING CO

JUDGEMENT

(1.) PURSUANT to the direction of this Court dt. 5th Jan. 1981, in TCP Nos. 363 and 364 of 1980, the Tribunal referred the following common question for our opinion under s. 256(1) of the IT Act, 1961 (hereinafter referred to as "the Act").

(2.) FOR the asst. yrs. 1974-75 and 1975-76, the assessee-firm, consisting of seven partners, was carrying on business in paper and other accessories and also had an ink-selling agency. The firm was registered for the asst. yr. 1967-68 and thereafter registration was renewed from year to year. FOR the asst. yr. 1974-75 also, the ITO continued the registration on the basis of the assessee's application in FORm No. 12 dt. 12th April, 1974. The total income was computed on a sum of Rs. 2,40,680 as against the declared income of Rs. 2,01,060 in the original return including an income of Rs. 39,424 shown by the assessee in the revised return on the basis of the examination conducted by the ITO. This sum represented a claim for the deduction of the commission claimed by the assessee and said to have been paid to various persons out of the commission received by it as a sole selling agent of the products of Coronation Printing Ink Manufacturing Co.. The assessee finally agreed to be assessed on this sum. In a covering letter dt 7th Nov., 1975, accompanying the revised return, the assessee stated that though payments were actually made it was not able to prove them and, therefore, they were furnishing a revised return adding back this sum. Later on, the CIT initiated proceeding under s. 263 of the Act on the ground that registration should not have been continued by the ITO as neither the true profits nor the book profits of the firm had been distributed amongst the partners according to the terms of the partnership deed. Relying on the Supreme Court decision in Khanjan Lal Sewak Ram vs. CIT the CIT directed the ITO to treat the firm as the unregistered firm after cancelling the grant of continuation of registration.

(3.) A plain reading of the abovesaid judgment would go to show that the Supreme Court gave a decision with reference to the rules they considered and the rules did require the division of profits. In the present case, the continuation of registration was granted by the ITO for the two assessment years under consideration under s. 184(7) of the Act. There is no change in the constitution of the firm or share of the partners as can be seen from the instrument on the basis of which registration was sought for in accordance with r. 24. Form No. 12 was filed. Form No. 12 would go to show that no declaration was required by the partners about the distribution of profits. In the absence of any such requirement in either s. 184(7) or the rules or in Form No. 12, the decision rendered in Khanjan Lal Sewak Ram's case (supra) cannot be made applicable. The firm distributed the profits according to the books, wherein certain items of expenditure have been claimed. The partners have agreed that these sums are outgoings to arrive at the divisible profits. Therefore, it cannot be said that no divisible profits have been divided. The fact that the ITO added an amount on the admission of the assessee would not amount to concealment of income. In Khanjan Lal Sewak Ram vs. CIT (supra), one partner was complaining that he was not given his due share. There is no such complaint in the present case among the partners. The CIT pointed out that there was concealment only on the basis of the admission by the firm by filing the revised return and the partners offering the undistributed portion in their WT returns. A covering letter was filed and it was explained as to why the partners offered this sum in the WT returns. According to the CIT, the concealed income had not been divided amongst the partners in the books of account or anywhere. If the income is concealed income, it cannot be expected to be divided in the books. The partners were not examined to find out whether they have divided or not before concluding that they have not divided the book profit. What will be the divisible profits is for the partners to decide. The question of division has to be considered in the light of the partnership books and profits. The partners may divide profits in any manner and at any time they may like. Therefore, the facts arising in this case entirely different from the facts arising in Khanjan Lal Sewak Ram vs. CIT (supra). Without examining the partners or examining the persons to whom commission has been paid, concealment cannot be presumed. The addition was made by the consent of the assessee. The explanation was offered in the letter dt. 7th Nov., 1975, for the circumstances under which the assessee agreed for the addition. Form No. 12 under s. 184(7) does not require any declaration from the persons that the profits were divided or credited. Hence, it cannot be said that the order of the ITO in granting continuation of registration for the assessment years under consideration is erroneous and prejudicial to the interest of Revenue. Accordingly, action under s. 263 of the Act is unwarranted. In that view of the matter, we uphold the order passed by the Tribunal in setting aside the order passed by the CIT under s. 263 of the Act and restore the grant of continuation of registration by the ITO for the assessment year under consideration.