COMMISSIONER OF INCOME TAX Vs. DCOSTA BROTHERS

JUDGEMENT

(1.) THIS reference arises out of the Tribunal's order granting registration to the partnership firm by reversing the orders of the income -tax authorities. The assessee is a partnership firm constituted under a deed of partnership of date March 5, 1954. The partners are the family members : five brothers and four sisters. Clause 7 of the deed of partnership provides : 'Net profits or losses of the partnership business arrived at after deducting the partners' salaries together with other business expenses shall be divided between the partners (as mentioned therein).'

(2.) IN short each brother gets 3/23rd share and each sister gets 2/23rd share. We are here concerned with the assessment year 1954 -55, the relevant accounting year is one ended on 31st March, 1954. This deed of partnership was executed during the course of the accounting year though not at its commencement. The assessee firm made an application year though not at its commencement. The assessee firm made an application for registration of the aforesaid partnership deed under section 26A of the Indian Income -tax Act in the prescribed form. In dealing with this application the Income -tax Officer found that household expenses amounting to Rs. 6,110 and Rs. 704 were debited to the profit and loss account of the firm. This, according to the Income -tax Officer, was not a business expense and, therefore, to that extent the profits made by the firm were reduced. This, according to the Income -tax Officer, resulted in no distributing the profits in accordance with the terms of the partnership deed. He, therefore, rejected the application of the firm for registration. The other ground, on which registration was refused was that the instrument of partnership was drawn up almost towards the end of the year. We are, however, not concerned with the second ground on which the application was rejected. The assessee appealed against this order to the Appellate Assistant Commissioner, who agreed with the Income -tax Officer in his view that the sharing of trade profits not having been properly made, registration could not be granted to the assessee firm. Assessee took a further appeal to the Tribunal. The Tribunal allowed the appeal and directed that the deed of partnership be registered. In its order it observed : 'We would like to add that the genuineness of the firm has yet not been doubted by the income -tax authorities in spite of the household expenses being debited to the profit and loss account. If the firm is genuine merely debiting personal expenses of partner to the profit and loss account before the profits are divided would not be tantamount to not dividing the profits of the firm in accordance with the terms of the partnership deed.'

(3.) MR . Joshi, appearing for the revenue, raised two contentions before us. Firstly, he contends that a deed of partnership describes the mode of ascertaining the profits. According to that mode the net profits or loss of the partnership business are to be arrived at after deducting the partners' salaries together with other business expenses. Household expenses cannot be treated as business expenses and debiting the household expenses to the profit and loss account is not in accordance with the terms of the partnership deed. True profits of the business, therefore, have not been determined and divided amongst the partners in accordance with the terms of the deed. The certificate granted by the assessee at the foot of the application thus being incorrect, the Income -tax Officer is entitled to refuse registration and has rightly done so. The Tribunal was, therefore, in error in granting registration. The second contention raised by Mr. Joshi is that particulars of apportionment of income, profits and gains (loss) of the business which the assessee is required to mention in Schedule B of his application has to be understood in the sense these terms are understood in the Income -tax Act. If the apportionment of profits shown by the assessee in Schedule B is not in accordance with the provisions of the Income -tax Act, then the certification made by the assessee in his application being incorrect, the Income -tax Officer is entitled to reject the application for registration, under rule 4 of the Rules framed under the Income -tax Act, on the ground that the application has not been properly made.