COMMISSIONER OF INCOME-TAX Vs. KRISHNA STEELS

JUDGEMENT

(1.) THIS is a reference under Section 256(1) of the I.T. Act, 1961. It relates to the assessment year 1971 -72. The assessee is a partnership firm which was formed on September 1, 1969, for running a re -rolling mill and for manufacture, purchase and sale of certain kinds of iron and steel. A partnership instrument was drawn up on September 15, 1970. The partners are Smt. Sabaz Mala Jain and Sarvasri Sushil Chand Jain, Satish Chand Jain, Ramesh Chand Jain and Anil Agarwal. The accounts were to be closed on the 31st of March each year and for the year under consideration the accounts were closed on March 31, 1971. The assessee filed an application for registration along with a certified copy of the partnership deed on March 16, 1971. The ITO refused to register the firm on the grounds that the assessee had not applied for registration in the proper and the prescribed form, that the original partnership deed had not been filed within the prescribed time, that there was no mutual agency and privity amongst the partners, that the firm had not distributed the loss as required in the partnership deed and, lastly, that the relationship between Rarnesh Chand Jain and Sri Agarwal was that of servant and master.

(2.) THE assessee appealed. The AAC did not agree with the reasons given by the ITO except one and that was that the loss of the year under consideration had not been divided amongst the partners in accordance with the terms of the partnership deed. The AAC found that for the first year the accounts were closed on March 31, 1970, and there was a loss of Rs. 14,653. For the assessment year 1971 -72, again, there was a loss and it was Rs. 1,39,096. Thus, the total loss of these two years amounting to Rs. 1,54,749 was shown in the balance -sheet filed by theassessee along with the return of income. Subsequently, a revised balance -sheet was filed showing the allocation of the loss and that too on the assetsside in the following manner :

(3.) NOW , at the instance of the Commissioner, the following two questions have been referred to this court for its opinion :