MADHUSUDANA AND CO Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) IN compliance with the direction of this court under Section 66(2) of the INcome-tax Act, 1922 (hereinafter called " the Act"), the INcome-tax Appellate Tribunal, Hyderabad Bench, has stated a case for our opinion on the following question of law:

(2.) FOR a proper appreciation of the scope of the reference, it is necessary to refer to the material facts that gave rise to the question : One Yadam Chennaiah, an agriculturist of Karumuru village in Repalle Taluk, Guntur District, joined in 1950, as a partner in a firm styled M. Bullaiah and Maddula Venkatramaiah executing road contracts. In the year 1952, he came to Chirala where his father-in-law was residing and obtained contracts from the Indian Leaf Tobacco Development Company Ltd. (hereinafter referred to as " I.L.T.D. Co. Ltd.") for transportation of its goods. It was claimed by him that his business was actually carried on by him in partnership with three others, namely, Rosaiah, Kotaiah and Koteswara Rao, in accordance with, in the first instance, an oral agreement, later embodied in an instrument of partnership dated December 15, 1952. The firm constituted under the aforsaid instrument of partnership consisting of four partners with their profit-sharing ratios of 6 annas, 4 annas, 4 annas and 2 annas in a rupee was styled as Messrs. Madhusudana and Co. FOR the assessment year 1953-54 corresponding to the relevant accounting year coding with March 31, 1953, the registration of the firm under Section 26A of the Act was refused by the Income-tax Officer holding that the business was the sole concern of Sri Y. Chennaiah and the other three alleged partners were only dummies. FOR the assessment years 1954-55, 1955-56 and 1956-57, the assessee repeated his claim for registration but without success. The further contention of the assessee that the firm was registered with the Registrar of Firms on October 12, 1953, and the contract with the I.L.T.D. Co. Ltd., unlike in the prior year, was entered into by the firm as such in the subsequent three years, did not find favour with the Income-tax Officer who was of the view that those additional factors did not alter the real position of the assessee for the reasons stated in his order. The assessee preferred appeals to the Appellate Assistant Commissioner who rejected the appeal in so far as the assessment year 1953-54 was concerned. But, however, the appeals for the remaining three assessment years have been allowed holding that there was a valid and genuine partnership under the Registration and Partnership Acts from the very commencement of the relevant accounting years and the contracts with the I.L.T.D. Co. Ltd. were entered into by the firm and the profits had been credited to the partners in the respective profit-sharing ratios. Aggrieved by the order of the Appellate Assistant Commissioner, the Income-tax Officer preferred appeals to the Income-tax Appellate Tribunal for the assessment years 1954-55, 1955-56 and 1956-57 whereas the assessee filed an appeal in respect of the assessment year 1953-54. The Tribunal, on a consideration of the entire material on record, agreeing with the Income-tax Officer, was of the view that there was no genuine firm in existence and the entire business belonged to Y. Chennaiah alone, for the reasons stated in its order common to all the years and refused registration for all the years in question. The reference applications under Section 66(1) by the assessee have been rejected by the Tribunal on the ground that no question of law did arise out of its order. Hence this reference at the instance of the assessee in so far as the assessment years 1954-55, 1955-56 and 1956-57 are concerned.

(3.) BEFORE we proceed to consider the question referred for our opinion, we feel it convenient and profitable to advert to the provisions of the Act and rules relating to the grant of registration under the Act and the scope of the jurisdiction of this court under Section 66. Section 26A and Rules 2 to 6B of the rules deal with registration of firms. The registration of a firm under the Act is not a common law right nor is it a matter of course. It is a privilege conferred on the assessee-firms to be granted if the statutory requisite conditions prescribed under Section 26A and Rules 2 to 6B have been satisfied by the firms which were legally and genuinely in existence in the relevant years of account. The benefit of lower rates of tax is conferred on registered firms. A registered firm prior to the amendment of Sub-section (5) of Section 23 by the Finance Act, 1956, was not liable to tax as a unit. The share income of the firm after ascertainment has to be apportioned to the respective partners in whose hands the share income was liable to be taxed. Subsequent to the amendment of 1956, the registered firm as such is also liable to tax at a lower rate. In the case of unregistered firms, the assessment will be made on the firm as an entity. Hence, the assessee-firms seek for registration in order to obtain benefits conferred on such firms. A combined reading of Section 26A and Rules 2 to 6B manifests that if the application for registration made by a firm gives the requisite particulars prescribed by the rules, the Income-tax Officer has a statutory duty and obligation to register such a firm if it is in existence as evidenced by the instrument of partnership. In order that the firm may be entitled to registration, the following essential conditions must be fulfilled :--(1) that the firm should be constituted under an instrument of partnership specifying the individual shares of the partners ; (2) that an application on behalf of and signed by all the partners furnishing the requisite particulars as per Rules 2 to 6B has to be filed before the assessment of the income under Section 23 of the Act for the relevant year; (3) that the profits or losses, if any, should have been divided or credited in accordance with the terms of the instrument of partnership ; and (4) that a genuine partnership must have been in existence as evidenced by the deed in the relevant accounting year : Vide R. C. Mitter and Sons v. Commissioner of Income-tax, [1959] 36 I.T.R. 194 ; [1959] Supp. 2 S.C.R. 641 (S.C.). The discretion vested in the Income-tax Officer is of judicial character and he is not entitled to reject the application on suspicion or surmises. The firm as evidenced by the deed of partnership specifying the shares of the partners must be in existence during the year of account in respect of which registration is sought for and the instrument of partnership must have been executed before the close of the relevant accounting year. The profits of the firm must be ascertained amongst the partners and distributed or credited to their accounts in the books of account maintained by the firm. The firm must be a valid one. It must be said to be not in existence if it is a bogus or not a genuine one. The income-tax authorities have, therefore, to ascertain, firstly, whether the application is in the prescribed form, furnished the requisite information and material as required by the rules, and, secondly, whether a genuine and valid firm is in existence in the relevant accounting year. Where an application for registration under Section 26A is in conformity with the Rules, the jurisdiction of the Income-tax Officer is limited to ascertaining the fact whether the firm as evidenced by an instrument of partnership sought to be registered is a bogus one or void in law : vide Commissioner of Income-tax y. Sivakasi Match Exporting Co.,