DOSHI VASTRALAYA VS COMMISSIONER OF INCOME-TAX
1998 P T D 2394
[222 I T R 73]
[Madhya Pradesh High Court (India)]
Before A.R. Tiwari and N. K. Jain, JJ
DOSHI VASTRALAYA
versus
COMMISSIONER OF INCOME-TAX
Miscellaneous Civil Case No.68 of 1989, decided on 15/02/1996.
Income-tax---
----Firm---Registration---Prior distribution of profits in accordance with partnership deed is not a condition precedent---Failure to divide profits in accordance with partnership deed---Mistake rectified subsequently---Firm entitled to registration---Indian Income Tax Act, 1961, S.185.
In deciding an application for registration of a firm, the jurisdiction of the Income-tax Officer is confined to the ascertainment of the facts---(i) whether the application for registration is in conformity with the Act and the Rules, and (ii) whether the firm shown in the document presented for registration is a bogus one or has no legal existence. Under the Indian Income Tax Rules, 1922, an application for registration had to contain a recital that the partners certified that the profits or losses of the previous year were divided or credited to the accounts of the partners. However, under the Income Tax Rules 1962, the relevant recital in the application for registration states that the profits or losses of the previous year "were/will be" divided or credited to the accounts of the partners. Therefore, under the provisions of the Income Tax Rules 1962, prior distribution of profits and losses among the partners is not compulsory for entitlement of the firm to registration but a certificate that they "will be" divided or credited in future to the accounts of the partners will be sufficient compliance with the Rules for grant of registration.
The assessee-firm consisted of two partners whose shares were specified as 60% and 40%. It filed an application for registration. The Income-tax Officer noticed that the profits were distributed between the partners in equal proportion, not in conformity with the deed of partnership. He refused to grant registration and this was upheld by the Tribunal. On a reference:
Held, that the Income-tax Officer and also the two Appellate Authorities had held that the firm was not genuine because there was a mistake in the matter of distribution of profits. The mistake, however, appeared to be bona fide inasmuch as it was rectified on November 15, 1982, by making an adjustment entry. There was no material on record to infer that the different allocation of share inconsistent with the terms of the partnership deed was made for some ulterior motive. Prior distribution of profits/losses among the partners is no longer necessary to obtain registration. On the other hand, a mere certificate to the effect that such profits will be divided or credited in future to the accounts of the partners will be considered as sufficient compliance with the rules for grant of registration. The subsequent rectification of the mistake was sufficient compliance in the instant case. The firm was entitled to registration.
CIT v. Khanna Theatre (1990) 184 ITR 156 (MP) applied.
D.D. Vyas for the Commissioner
JUDGMENT
N.K. JAIN, J.---Pursuant to the order, dated August 6, 1988, made by this Court in Miscellaneous Civil Case No.303 of 1985 (see (1989) 175 ITR 309), the Income-tax Appellate Tribunal, Indore Bench, Indore, has under section 256(1) of the Income Tax Act, 1961 (for short "the Act"), referred the following question of law to this Court for its opinion (at page 310):
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee was not a genuine partnership firm because the profits of the assessee-firm had not been distributed in accordance with the terms of the partnership deed?"
In short, the facts material for the purpose of this reference are as follows:
The assessee is a partnership firm and as per partnership deed the shares of the partners were specified as under:
| Shri Gyanchand Doshi | 60 percent |
| Shri Uttam Doshi | 40 percent |
??????????? ???????????
On October 24, 1978, the assessee filed an application on Form No. 11 alongwith the deed of partnership for registration of the firm for the assessment year 1979-80. The Income-tax Officer noticed that the profits were distributed between the partners in equal proportion not in conformity with the deed of partnership. He, therefore, held that no genuine firm has come into existence in conformity with the terms and conditions of the instrument of partnership. He, therefore, vide his order, dated December 7, 1981, refused to grant registration. The assessee went in appeal before the Appellate Assistant Commissioner who, however, upheld the decision of the Income-tax Officer, vide his order, dated April 23, 1983. The assessee then came up in the second appeal before the Tribunal. The Tribunal also endorsed the aforesaid two orders and dismissed the appeal (vide order dated April 29, 1985). On an application made by the assessee under section 256(2) of the Act, this Court on August 6, 1988 (see (1989) 175 ITR 309), directed the Tribunal to state the case and refer the aforesaid question of law for its opinion, hence this reference.
We have heard learned counsel for the assessee and the Revenue and we are satisfied that this reference must be answered in favour of the assessee and against the Revenue. The controversy involved in the case is settled by a decision of this Court in CIT v. Khanna Theatre (1990) 184 ITR 156, wherein it was held (headnote):
"In deciding an application for registration of a firm, the jurisdiction of the Income-tax Officer is confined to the ascertainment of the facts, (i) whether the application for registration is in conformity with the Act and the Rules, and (ii) whether the firm shown in the document presented for registration is a bogus one or has no legal existence. Under the Indian Income Tax Rules, 1922, an application for registration had to contain a recital that the partners certified that the profits or losses of the previous year were divided or credited to the accounts of the partners. However, under the Income Tax Rules, 1962, the relevant recital in the application for registration states that the profits or losses of the previous year 'were/will be' divided or credited to the accounts of the partners. Therefore, under the provisions of the Income Tax Rules, 1962, prior distribution of profits and losses among the partners is not compulsory for entitlement of the firm to registration but a certificate that they will be divided or credited in future to the accounts of the partners will be sufficient compliance with the Rules for grant of registration. "
In the instant case, the Income-tax Officer and also the two appellate authorities have held that the firm was not genuine because there was a mistake in the matter of distribution of profits. The mistake, however, appeared to be bona fide inasmuch as it was rectified on November 15, 1982, by making an adjustment entry. We find that the Tribunal did not accept the situation as mistake as a result of repetition of mistakes. In our view; this was not the correct approach. The fact remains that, the assessee immediately on discovery of the mistake has properly corrected the mistake from the period it had occurred. There is no material on record to infer that the different allocation of share inconsistent with the terms of the partnership deed was made for some ulterior motive.
As held in the decision of the case of CIT v. Khanna Theatre (1990) 184 ITR 156 (MP), the prior distribution of profits/losses among the partners is no longer necessary to obtain registration. On the other hand, a mere certificate to the effect that such profits will be divided or credited in future to the accounts of the partners will be considered as sufficient compliance with the Rules for grant of registration. The subsequent rectification of mistake is sufficient compliance in the instant case. Change of law shows legislative intent.
In the result, we find that the Tribunal was not justified to label the partnership as un-genuine and pass the order on that basis. Our answer to the question referred to this Court by the Tribunal is, therefore, against the Revenue and in favour of the assessee. We, however, make no order as to costs of this reference. Counsel fee for each side is fixed at Rs.750, if certified. A copy of the order be sent to the Tribunal.
M.B.A./1517/FC:???????????????????????????????????????????????????????????????????????????????? Order accordingly.