KRISHNA GOPAL Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is a reference under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as " the Act").

(2.) THE assessee is a firm. It came into existence on 1st April, 1963. It had two partners, Krishna Gopal and Om Prakash, who are brothers. In the assessment year 1964-65, the assessee-firm filed its returns and applied for registration in Form No. 11 as prescribed by the Income-tax Rules. THE Income-tax Officer granted the registration under Section 185(1)(a) of the Act and completed the assessment in the status of a registered firm. In the course of the assessment proceedings the Income-tax Officer discovered a cash credit in the name of Jawar Singh. During the course of the assessment proceedings the assessee conceded thatthe deposit of Rs. 3,100 did not represent a genuine loan from Jawar Singh but actually it was the firm's income credited in a fictitious account. An offer was made that the amount in question may be included in the total income of the firm and tax may be levied accordingly. Subsequently, during the course of assessment proceedings for the assessment year 1967-68, the Income-tax Officer found that a sum of Rs. 2,000, out of the deposit of Rs. 3,100 in the name of Jawar Singh, was carried forward and credited to the account of Krishna Gopal, one of the partners. THE Income-tax Officer thus came to the conclusion that the sum of Rs. 3,100, which was admittedly the income of the firm, had not been divided between the partners in accordance with their shares specified in the partnership deed. He, accordingly, held that the firm was not a genuine firm and cancelled its registration granted earlier. Aggrieved, the assessee approached the Appellate Assistant Commissioner but did not succeed. Its appeal to the Income-tax Appellate Tribunal also failed. At the instance of the assessee, however, the Tribunal has now submitted the following question for the opinion of this court:

(3.) NOW, in the instant case, it was admitted on behalf of the firm that a sum of Rs. 3,100 which had been shown as loan from Jawar Singh was in fact the income of the firm but had not been included in the profit and loss account. The partners had divided the profits as appeared in the profit and loss account. The sum of Rs. 3,100 had not been divided either by passing appropriate entries in the books of account or outside the books. A clear finding to this effect has been recorded by the Tribunal. The fact that a sum of Rs. 2,000 out of Rs. 3,100 was carried over in the assessment year 1967-68 and credited to the account of one of the partners shows very clearly that the secreted profit of Rs. 3,100 had not been divided between the partners in accordance with their shares. On these findings it is clear that the firm was not a genuine firm and was not entitled to registration in the year 1964-65 and the registration had rightly been cancelled under Section 186 of the Act. This view finds full support from a decision of the Supreme Court in Khanjan Led Sewak Ram v. Commissioner of Income-tax [1972] 83 ITR 175 (SC). In that case, a firm applied for renewal of registration for the assessment year 1948-49 under Section 26A of the Indian Income-tax Act, 1922. The application was signed by all the partners and in paragragh 3 thereof they appended a certificate to the effect that " the profits of the previous year were divided or credited as shown below ". The Appellate Tribunal found that the firm had earned profits in the black market and though it had distributed its book profits among the partners according to the instrument of partnership it had not distributed the profits earned by it in the black market according to the instrument of partnership. The Supreme Court held that the application for renewal of registration made by the assessee-firm did not comply with the conditions prescribed in paragraph 3 of rule 6 of the Indian Income-tax Rules, 1922, and the firm was not entitled to renewal of registration for the assessment year 1948-49. Precisely the same is the position in the instant case. According to the findings of the Tribunal the sum of Rs. 3,100, which was admittedly the income of the firm, had not been credited to the partners' accounts or divided outside the books, and, as such, the certificate in Clause 3 of Form No. 11 was a false certificate. As a result, the firm became a non-genuine firm and its registration was rightly cancelled under Section 186 of the Act.