COMMISSIONER OF INCOME TAX Vs. KANAKA MAHAL

JUDGEMENT

(1.) Two questions are referred in this case under section 256(1) of the Income-tax Act, 1961. They are : "(1) Whether, on the facts and in the circumstances of the case, the allocation of profits made on the basis of the partnership deed dated July 17, 1973, could not be a ground for refusing grant of registration to the assessee-firm ? (2) Whether, on the facts and in the circumstances of the case, the assessee-firm was entitled to grant of registration under section 185 of the Income-tax Act, 1961 ?"

(2.) The assessee-firm was originally constituted under a deed of partnership dated 21/07/1968. There have been changes in the composition of the firm from time to time. For the accounting year relevant to the assessment year 1973-74, there were 8 partners, including on Sri Kanakam Babu. The genuineness of the firm was never doubted by the Income-tax Officer and registration was being granted to it year after year up to and including the assessment year 1973-74. In this case, we are concerned with the assessment year 1974-75. The accounting year relevant to the said assessment year is 1/09/1972, to 31/08/1973. During this accounting year, two deeds were executed by the partners. One was on 5/06/1973, resolving to admit the three minor sons and a minor daughter (in all four) of Sri Kanakam Babu to the benefits of partnership with effect from 1/09/1973. These minors were sought to be accommodated and adjusted within the 17% share held by Sri Kanakam Babu which means that there was no change in the shares of other partners; only Kanakam Babus share was affected. A deed was executed to that effect. It, however, appears that on the same day the partners met again and resolved to permit Sri Kanakam Babu to share his profits in the firm with his minor children with retrospective effect from 1/09/1972. In pursuance of this resolution, a fresh partnership deed was executed on 17/07/1973, whereunder the said minor children of Sri Kanakam Babu were admitted to the benefits of partnership with effect from 1/09/1972. Before the end of the said accounting year, the partners applied for registration/continuation of registration, by filing applications in Forms Nos. 11, 11A and 12. The Income-tax Officer refused to grant registration. The reasons for such refusal are : (a) the minors were actually admitted to the benefits of partnership only on 5/06/1973, and not from an anterior date, and hence they could not have been allotted any benefits or share with retrospective effect from 1/09/1972, (b) the instrument of partnership dated 17/07/1973, did not specifically stipulate the date of commencement of the new partnership; and (c) the profits for the period 1/09/1972. to 5/06/1973, have to be divided only in accordance with the partnership deed dated July 21, 1968. But inasmuch as the profits were divided with reference to the deed dated 17/07/1973, the firm is not entitled to registration.

(3.) On appeal, the Appellate Assistant Commissioner disagreed with the Income-tax Officer and held that once the firm is found to be genuine and has complied with the provisions of section 185 of the Act, there was no justification for refusing registration. On further appeal by the Revenue, the Tribunal agreed with the Appellate Assistant Commissioner. The Tribunal observed that since the Income-tax Officer has not doubted the genuineness of the firm as constituted by the deed dated 17/07/1973, and also because there was an application made in accordance with the provisions of law, registration ought to have been granted. The Tribunal observed further that the mere assumption that the purported retrospective operation given to the partnership deed was bad was not fatal to the claim for registration. Similarly, the fact that at the end of the accounting year, profits were apportioned among all the 12 partners (including minors), cannot be a ground for refusing registration. The Tribunal posed the question arising in the case in the following words : "The real question that has to be considered is whether the apportionment of the profits amongst the partners according to the partnership deed dated July 17, 1973, could be a ground for refusing to grant registration......"