COMMISSIONER OF INCOME TAX Vs. MADANLAL CHHAGANLAL

JUDGEMENT

(1.) AT the instance of the Commissioner of Income -tax, Madhya Pradesh, the Tribunal has, under section 66(1) of the Income -tax Act, 1922, referred to this court the following question of law :

(2.) THE facts giving rise to this reference, as disclosed in the statement of the case, are these. Madanlal, who was dealing in silver and gold ornaments, was the sole proprietor of the business which he carried on. He entered into an agreement with his brother, Chhaganlal, by which they became equal partners in the business with effect from October 24, 1957. The terms and conditions on which they joined the partnership are contained in the deed dated January 9, 1958. One of these terms provides that each partner will be entitled to interest at 6 per cent. per annum on his capital investment. This partnership was duly registered with the Registrar of Firms and the bankers were also informed of the change in the ownership of the business. On April 4, 1958, the partners duly made an application in the prescribed form for registration of the firm under section 26A of the Income -tax Act stating, inter alia, that the profits or losses of the previous years would be divided as disclosed in Section B of the Schedule to that application. That schedule showed that the profits or losses would be divided equally after deducting interest on capital advances made by the partners. Subsequently, when the account of the profits for the relevant year was made, interest was not credited. The Income -tax Officer rejected the application because 'not only the clause regarding provision of interest has not been compiled with but also division of profit has not been made in accordance with the specific provision of the deed.' The Appellate Assistant Commissioner of Income -tax took the same view. On further appeal, the Tribunal took a different view mainly on the ground that the declaration in the application had reference only to the proportion in which the partners would share the profits and it was not the case of the department that the profits were not divided in that proportion.

(3.) IT is implicit in these provisions that an application made under rule 3 is liable to be dismissed if the Income -tax Officer is not satisfied that :