COMMISSIONER OF INCOME TAX Vs. HARI RAM KHANNA

JUDGEMENT

(1.) THIS reference relates to the assessment years 1962-63 and 1963-64. The assessee-firm originally carried on business in the status of a HUF. On October 18, 1960, a partial partition took place between the coparceners. The business conducted by the HUF was taken over by a firm consisting of Hari Ram Khanna and his two sons, Tilak Raj and Sudarshan Kumar. The firm was constituted under a deed of partnership dated October 19, 1960. It disclosed that the share of Hari Ram was six annas and those of his two sons five annas each. The claim of partial partition was accepted by the ITO by an order dated August 18, 1966. For the assessment year 1962-63, the assessee-firm was granted registration. Subsequently, the CIT passed an order under Section 263 setting aside the assessment of the firm in the status of a partnership firm and directed the ITO to make the assessment afresh. The Commissioner found that though the application for registration was made in the proper form and within time, yet actually the division of share of the profits was not made in accordance with the division of profit indicated in the partnership deedr. The deviation was that Hari Ram Khanna instead of getting six annas and his two sons getting five annas each, they were given equal shares, that is to say, the two sons got 5-1/3 instead of 5 annas each. The Commissioner did not accept the assessee's submission that the distribution of the book profits had been inadvertently made by the accountant. Considering all the circumstances, the Commissioner came to the conclusion that the firm was not genuine and so was not entitled to registration.

(2.) IN response to this directive, the ITO cancelled the registration of the firm. He passed another order for the assessment year 1963-64 refusing registration. He assessed the firm in the status of an association of persons.

(3.) AT the instance of the Commissioner, the Tribunal has referred the following question of law for our opinion: