COMMISSIONER OF INCOME TAX Vs. RAMCHANDRA UDHAVDASS

JUDGEMENT

(1.) THE Income-tax Appellate Tribunal has referred the following question of law arising out of its order dated October 30, 1981, under Section 256(1) of the Income-tax Act, 1961, in respect of the assessment year 1974-75 :

(2.) THE brief facts of the case are that the firm, Messrs. Ramchandra Udhavdass, was constituted by a deed dated February 5, 1972, consisting of Ramchandra, Udhavdass and Gurnamal sharing the profits and losses at 40 per cent., 35 per cent. and 25 per cent., respectively. THE registration for the assessment year 1973-74 was granted by the Income-tax Officer. THE firm follows the calendar year as its previous year. Ramchandra expired on July 24, 1973, and, therefore, in accordance with the provisions of Clause 7 of the partnership deed dated February 5, 1972, Smt. Sakhi Bai was admitted as a partner with effect from July 25, 1973, in place of Ramchandra. THE new deed of partnership was executed on August 21, 1973. THE Income-tax Officer granted registration to the firm under Section 185(1) of the Income-tax Act, 1961, on March 22, 1976. Later on, proceedings under Section 186(1) of the Act were initiated, as the Income-tax Officer found that in the return filed by the firm for the assessment year 1974-75 on July 1, 1974, the profit for the period from January 1, 1973, to December 31, 1973, has been distributed to Ramchandra, Udhavdass and Gurnamal. Since the profit up to July 24, 1973, the date on which Ramchandra expired, was not worked out and the entire profit up to December 31, 1973, was credited to the account of Ramchandra without making any entry in the account of Smt. Sakhi Bai, the new partner, the profits were considered as not divided in accordance with the terms of the partnership deed for the assessment year 1974-75. A notice was issued to the assessee on March 12, 1979, for cancellation of the registration earlier granted. THE assessee filed its reply and it was submitted that the books of account were not closed on July 24, 1973, and the firm was not dissolved on the death of Ramchandra and only Smt. Sakhi Bai was taken in his place as partner. THE share of Sakhi Bai was posted in the old account of Ramchandra and was also posted in a separate account named as Ramchandra Sakhi Bai. It was also submitted that because the profit of the firm could have been ascertained only on the last day, i.e., December 31, 1973, therefore, on the death of Ramchandra, his legal heir, Smt. Sakhi Bai, was the owner of the share of the profit. THE Income-tax Officer found that there is no account in the name of Sakhi Bai in the books of account and the entire amount of profit has been credited in the account of Ramchandra Sakhi Bai. According to the Income-tax Officer, the entire profit could not have been credited to the account of Ramchandra since she was not a partner for the whole of the year. A copy of the accounts as existing in the books of account for the assessment years 1973-74, 1974-75, 1975-76 and 1976-77 was also submitted. Since the profit for the assessment year 1974-75 was not divided and credited to the account of Sakhi Bai, the Income-tax Officer was of the view that the profit was not divided amongst the partners in accordance with the share specified in the deed of partnership and, therefore, the assessee-firm cannot be said to have been genuinely constituted as per the partnership deed. THE registration which was granted under Section 185 was cancelled and the firm was treated as an unregistered firm.