RAVINDRA INDUSTRIES VS COMMISSIONER OF INCOME-TAX
1999 P T D 305
[225 1 T R 1040]
[Gujarat High Court (India)]
Before R. K. Abichandani and Rajesh Balia, J
RAVINDRA INDUSTRIES
Versus
COMMISSIONER OF INCOME-TAX
Income-tax Reference No.340 of 1983, decided on 09/12/1996.
Income-tax
---Firm---Registration---Cancellation---Permissible only where firm not found genuine---That profits not allocated to retiring partner but only to partners continuing at end of previous year---No ground for cancellation of registration---Indian Income Tax Act, 1961, Ss. 184, 185, 186 & 187.
From sections 184 to 186 of the Indian Income Tax Act, 1961, it is apparent that once the procedural requirements are complied with about the making of an application for registration of the firm and furnishing of the partnership deed, etc., the only enquiry germane for consideration regarding the question of registration is whether the firm which is seeking registration is genuine and existed during the previous year concerned. No other consideration enters the scrutiny at the stage of grant of registration. Section 186 deals with cancellation of registration already granted. It speaks of only one ground on the basis of which registration can be cancelled, viz., where the Assessing Officer was of the opinion that during the previous year, no genuine firm was in existence as registered. The assessment of taxable income in the hands of the firm and allocation of profits amongst the partners after adjusting the allowable expenses or outgoings in the name of the partners for the purposes of assessment of the income of the partners individually in their hands is part of the assessment proceedings having relation to computation. The allocation of shares to the persons/partners entitled to receive the same in the previous year in question is an obligation cast on the Assessing Officer while framing the assessment of the relevant assessment year, but is not an obligation cast on the assessee for the purposes of seeking registration of the firm nor is it a part of any relevant consideration for considering the question of grant of registration or cancellation of registration.
The assessee-firm, originally constituted by three partners, was a registered firm for the purposes of the Income Tax Act, 1961. The accounting year of the firm was the calendar year. During the previous year relevant to the assessment year 1976-77, one of the partners, S, retired on March 31, 1975, and the remaining two partners continued to carry on the business of the firm without dissolution of the same---that is to say, the assessee-firm continued to exist in a reconstituted form. The assessee applied for registration in terms of section 184(8) of the Income Tax Act, 1961, in Form No. 11-A together with the new partnership deed. Recording a finding as to procedural compliance and satisfying himself about the genuineness of the firm and the change in the constitution of the firm, the Income-tax Officer granted registration to the firm for the assessment year 1976-77. The allocation of the entire profit of the calendar year was made between the two existing partners as at the end of the previous year. The Commissioner of Income-tax, in revision, cancelled the registration granted to the assessee, on the ground that the Income-tax Officer instead of allocating the income of the firm for the first period, i.e., from January 1, 1975, to March 31, 1975, amongst three partners and the income for the remaining period between two partners according to the respective partnership deeds, had allocated the entire income of the firm for the whole year only between the two remaining partners equally. The Tribunal confirmed this. On a reference:
Held accordingly, that the Income-tax Officer under section 185 had recorded in unequivocal terms that during the previous year a genuine firm was in existence. That finding had not been found to be erroneous by the Commissioner in any respect. Therefore, registration of the firm could not have been cancelled in law.
CIT v. Ashokbhai Chimanbhai (1965) 56 ITR 42 (SC) ref.
D.A. Mehta, R.K. Patel and B.D. Karia for K.C. Patel for the Assessee.
M.J. Thakore and Manish R. Bhatt for the Commissioner
JUDGMENT
RAJESH BALIA, J.---At the instance of the assessee, the Income tax Appellate Tribunal, Ahmedabad Bench "C", has referred the following two questions, said to be arising out of its appellate order in I.T.A. No.2120/(Ahd.) of 1981 for the assessment year 1976-77, for our opinion:
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in interpreting the deed of partnership in question correctly and in holding that Shri H.N. Shah, retiring partner had to ask for and received profits, if any, for three months during the period when he was a partner in the assessee-firm?
(2) Whether the Tribunal was justified in law in upholding the order passed under section 263 of the Act especially when the factum of understanding between the partners as to withdrawal of credit balance only on retirement was never challenged by the Revenue?"
From a perusal of the order of the Tribunal and the Commissioner of Income-tax, we are of the opinion that the question suggested by the assessee and referred to us by the Tribunal do not bring out the controversy in its proper perspective and require refraining and, in our opinion, the only question that arises out of the Tribunal's order is- ,
"Whether, in the facts and circumstances of the case, the Tribunal was justified in law in affirming the decision of the Commissioner, of Income-tax for cancelling the order of registration granted in A. favour of the petitioner-firm by the Income-tax Officer and directing to give effect to the same?
The assessee originally constituted by three partners was a registered firm for the purposes of the Income-tax Act. During the previous year relevant to the assessment year 1976-77, one of the partners, Shri H.N. Shah, retired on March 31, 1975, and the remaining two partners continued to carry on the business of the firm without dissolution of the same---that is to say, the assessee-firm continued to exist in a reconstituted form. As per the requirement of section 184 of the Income-tax Act, as it stood at the relevant time, the assessee made an application in Form No. II-A in terms of section 184(8) of the Act. By the order, dated September 10, 1979, the income-tax Officer held that there was a change in the partnership deed, Form NO. 11-A together with the partnership deed and duplicate thereof was filed, and new partnership deed is executed on May 13, 1975, and the firm is genuine. On the findings about procedural compliance and satisfying himself about the genuineness of the firm and the change in the constitution of the firm, registration was granted to the firm for the assessment year 1976-77 as well by the Income-tax Officer. The assessment of the newly constituted firm was made by apportioning the profit of the firm for the calendar year, 1975. The firm was having the calendar year, as its accounting period. The allocation of the entire profit of the calendar year was made between the two existing partners as on the date of the end of the previous year, presumably relying on the principle laid down by the Supreme Court in CIT v. Ashokbhai Chimanbhai (1965) 56 ITR 42, holding that the right to receive the share in the profit for the year arises on the settlement of the account of the firm at the end of the accounting period.
The Commissioner of Income-tax holding the opinion that the Income-tax Officer instead of allocating the income of the firm for the first period, i.e., from January 1, 1975, to March 31, 1975, amongst three partners and the income for the remaining period between two partners according to the respective partnership deeds, allocated the entire income of the firm for the whole year only between Shri P.R. Shah and Shri N.M. Sindhe equally. Since the income of the assessee-firm was not properly allocated and distributed, the Income-tax Officer should not have granted registration. Granting of registration under the circumstances narrated above has not only resulted in an erroneous order but is also prejudicial to the interests of the Revenue. On this basis after issuing show-cause notice to the firm, he made an order cancelling the registration of the firm on August 27, 1981. On appeal, the Tribunal affirmed the conclusion of the Commissioner and upheld the order under section 263 cancelling the registration and directing the Income-tax Officer to give effect to that order accordingly. The Tribunal found that on March 31, 1975, there was a change in the constitution of the firm inasmuch as one of the partners Shri H.N. Shah, retired from the firm leaving behind two partners, namely, Shri P.R. Shah and Shri N.M. Sindhe. Both the partners had an equal share in the profits and losses of the assessee-firm and an equal share was distributed for the whole year. Nothing was given to the retired partner, i.e., Shri H.N. Shah. On these premises, the Tribunal further concluded "to suns up the case, the condition for registration is that the profits should be distributed as provided in. the deed of partnership. The same condition has not been fulfilled in the case. Therefore, in our opinion, the Commissioner of Income-tax has rightly cancelled the order of the Income-tax Officer and he was fully justified in directing the Income-tax Officer to give effect to his order." In coming to the conclusion that requirement of allotment of share to the partners including to the retired partners at the close of the accounting period, it distinguished the Supreme Court decision in CIT v. Ashokbhai Chimanbhai (1965) 56 ITR 42 on the ground that there was no agreement between the retiring partner and the remaining partners about non-allotment of the shares up to the date of retirement and also on the ground that facts of the decision in Ashok Chimanbhai's case (1965) 56 ITR 42 (SC) were different and the ratio was laid down in a different context.
It has been contended before us by learned counsel for the assessee that apart from the question about entitlement to a share in the profit of the firm which can be ascertained only at the close of the accounting period in the case of a business continued by the reconstituted firm, there is no entitlement to a share in the profit to a retired partner unless there is an agreement to the contrary because the share itself cannot be determined and known unless accounts are settled and the profits are known on the last date of the accounting period and because there is no day-to-day accrual of the profit. The Commissioner of Income-tax as well as the Tribunal have erred in ignoring the relevant provisions of the statute, inasmuch as apportionment of share of the profit amongst partners or amongst those who are entitled to it at the close of the year as such has no relevant bearing on the question of registration of the firm. The exercise of apportionment is a part of the procedure of assessment of the income chargeable to tax in the hands of the firm and if the assessment has been of any error, in the formation of assessment, it does not render the order granting registration erroneous and prejudicial to the interests of the Revenue. The error in the assessment order, even if assumed to be there, cannot render registration of the firm liable to be cancelled on that ground. In that eventuality, at best the Commissioner could have exercised his jurisdiction to correct the error that has crept in the assessment, but he could not have altered the status of the firm as a registered firm, which has been validly granted and for which no ground is made out for holding that to be erroneous.
Under the Income-tax Act, a firm, which is not a juristic person and having an entity independent of its partners under the general law of partners, is an independent unit of assessment independent from the partners who constitute it and a special procedure for the assessment of the income of the firm has been made. Chapter XVI of the Income Tax Act enacts special provisions applicable to firms. Under sections 182 and 183 it envisages that assessment of a firm may be either as a registered firm or as an unregistered firm. Section 184 as it read at the relevant time, is reproduced here in below:
" 184. (1) An application for registration of a firm for the purposes of this Act may be made to the Income-tax Officer on behalf of any firm, if---
(i) The partnership is evidenced by an instrument; and
(ii) The individual shares of the partners are specified in that instrument.
(2) Such application may, subject to the provisions of this section, be made either during the existence of the firm or after its dissolution.
(3) The application shall be made to the Income-tax Officer having jurisdiction to asses the firm, and shall be signed---
(a) By all the partners (not being minors) personally; or
(b) In the case of a dissolved firm, by all persons (not being minors) who were partners in the firm immediately before its dissolution and by the legal representative of any such partner who is deceased...
(6) The application shall be made in the prescribed form and shall contain the prescribed particulars.
(7) Where registration is granted to any firm for any assessment year, it shall have effect for every subsequent assessment year:
Provided that---
(i) There is no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership on the basis of which the registration was granted; and
(ii) The firm furnishes, before the expiry of the time allowed under subsection (1) or subsection (2) of section 139 (whether fixed originally or on extension) for furnishing the return of income for such subsequent assessment year, a declaration to that effect, in the prescribed form and verified in the prescribed manner, so, however, that where the Income-tax Officer is satisfied that the firm was prevented by sufficient cause from furnishing the declaration within the time so allowed, he may allow the firm to furnish the declaration at any time before the assessment is made.
(8) Where any such change has taken place in the previous year, the firm shall apply for fresh registration for the assessment year concerned in accordance with the provisions of this section."
A close reading of the aforesaid provision makes it clear that the first requirement for registration is that an application for registration of firm should be made in the prescribed form, which can be considered if the partnership is evidenced by an instrument, the individual shares of the partners are specified in that instrument, and it could be made either during the existence of the firm or after its dissolution.
Subsection (7) envisages that where registration is granted or is deemed to have been granted to any firm for any assessment year, it continues for subsequent assessment years also subject to the condition that there is no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership which has formed the basis of granting registration and the firm furnishes within the time specified in the proviso the declaration to the effect that no change in the constitution has taken place during the year, nor there is a change in the shares of the partners. At the same time, it also envisages that where any change has taken place in the previous year, the firm must apply for fresh registration for the assessment year concerned in accordance with the provisions of the Act.
There is no dispute that in the constitution of the firm a change had taken place by retirement of one of the partners during the previous year relevant to the assessment year 1976-77 and it duly applied under the aforesaid provision for fresh registration fulfilling all the conditions of the provisions. In section 185 the condition for grant of registration specified is that if the Assessing Officer is satisfied that there is or was in the previous year in existence a genuine firm with the constitution so specified, he shall pass an order in writing to register the firm for the assessment year. It also provides a converse provision that if he is not so satisfied, he shall pass an order in writing refusing to register the firm. Apart from this specific provision, section 185 also deals with contingencies in which registration may not be granted. These are where the Assessing Officer considers that application for registration is not in order, he shall after giving opportunity to rectify the defect and if such defect is not rectified within the specified time he can refuse to register the firm and reject the application. Likewise, if the Assessing Officer considers that a declaration required to be furnished by [he firm for continuance of the registration under subsection (7) of section 184 is not in order, after intimating the assessee to rectify the defect in the declaration within the time specified in the notice and the same having not been removed, a declaration may be made that the registration was not continuing for the assessment year in question. He can also decline to grant registration in case there is any failure on the part of the assessee, as is mentioned in section 144 that is to say, in complying with the requirement of notices, etc., and failure to such compliance would result in authorising the Assessing Officer to frame best judgment assessments.
Section 186 deals with cancellation of registration already granted. It speaks of only one ground on the basis of which registration can be cancelled, viz., where the Assessing Officer was on the opinion that during the previous year, no genuine firm was in existence as registered, he may after giving the firm a reasonable opportunity of being heard, cancel the registration of that firm for the assessment year.
From the aforesaid provisions, it is apparent that once the procedural requirements are complied with about the making of an application and the furnishing of the partnership deed, etc., the only enquiry germane for consideration regarding the question of registration is whether the firm which is seeking registration is genuine and existed during the previous year concerned. No other consideration enters for a scrutiny at the stage of grant of registration. The provisions in cases where registration may be refused deals with the other grounds where requirement of procedure for making application had not been properly fulfilled. In that event, the application for registration or declaration of continuance of the firm may be rejected on the ground of the same being not in order after giving an opportunity to rectify the defects and the same remains to be removed. But subsequent to the grant of registration, it can be recalled only on the ground, not on the basis of failure on the part of procedure but of a substantive ground, on the finding that a genuine firm was not in existence during the relevant assessment year. The aforesaid provisions which are the provisions in Part B of Chapter XVI relating to registration of firms in their circumspect reading do not permit reconsideration of registration on the ground that subsequent to the grant of registration there is any error in allotment of shares of the firm amongst the persons entitled to it in respect of a firm which is genuinely in existence. Obviously such step has not been thought fit to be taken into consideration by the statute to make it a part of the consideration for registration because the assessment of taxable income in the hands of the firm and allocation of profits amongst the partners after adjusting the allowable expenses or outgoings in the name of the partners for the purposes of assessment of the income of the partners individually in their hands is part of the assessment proceedings having relation to computation of income. Sections 187 and 188 which deal with changes in the constitution of the firm and succession and dissolution of the firm specifically deal with this part. Section 187 provides that where at the time of making an assessment under section 143 or section 143 or section 144, it is found that a change has occurred in the constitution of a firm, the assessment shall be made on the firm as constituted at the time of making the assessment. This provision obviously applies at the time when actual assessment is taking place. It may be that, at the time of actual assessment, the firm as constituted during the relevant previous year of the assessment for which assessment is being made, may or may not be existing in the same form. If, at the time of assessment, the same firm is continuing to exist without there being a succession in its reconstituted form either by a change in the partners or change in the ratio of profits sharing or both. Reconstitution of a firm has been treated to be distinct from succession of the firm as we shall presently see with reference to the other provisions of the Act. The proviso which existed during the relevant assessment year to section 1870) required of the Assessing Officer that income of the previous year shall, for the purposes of inclusion in the total income off the partners, be apportioned between the partners who, in such previous year, were entitled to receive the same and that when the tax assessed upon a partner cannot be recovered from him, it shall be recovered from the firm as constituted at the time of making the assessment.
The aforesaid provision makes it abundantly clear that firstly the question of apportionment of income of the firm amongst the partners, who were entitled to receive the same during the previous year in question arises for the purpose of including the same in the income of the partners personal assessment and secondly for the purpose of making it clear that though payment of tax on such share of the partner which is liable to be included in his own income continues to be the primary responsibility of the partner concerned nonetheless if he fails to discharge his obligation to pay tax in respect of his income from the share in the firm of that period in which the firm continued to carry on business as reconstituted, such reconstituted firm as is in existence at the time of assessment becomes responsible for making payment of that tax in that respect, notwithstanding that it may not be existing in that form during the relevant previous year assessment of which is being framed. Section 188 envisages that where a firm carrying on a business or profession is succeeded by another firm, and the case is not one covered by section 187, which we referred to above, separate assessment shall be made on the predecessor firm and the successor firm in accordance with the provisions of section 170.
These two provisions read together leave no room for doubt that reconstitution of the firm is quite distinct from succession of firm for the purposes of the Income-tax Act. In the former, there is no break in the continued existence of the firm as an entity, but with the change of partners or change in the ratio of profit-sharing or change in both and in the latter case on occurrence of such change the existing firm comes to an end and stands dissolved and the question of succession becomes relevant. If a new firm came into existence, it comes into existence severing its connection with the past firm. We are not presently concerned in what cases changes can be considered as reconstitution and in what cases changes could result in succession as that is not germane for the present discussion.
However, the aforesaid provision also makes it clear that allocation of the shares to the person/partners entitled to receive the same in the previous year in question is an obligation cast on the Assessing Officer while framing the assessment of the relevant assessment year, but is not an obligation cast on the assessee for the purposes of seeking registration of the firm nor is it a part of any relevant consideration for considering the question of grant of the registration or cancellation of registration. The fact remains that so far as compliance with the procedural requirement of submission of forms or documents are concerned, there is no dispute that the assessee has complied with the same. His application was found in order and it was liable to be considered in terms of section 185. The Income-tax Officer under section 185 has recorded in unequivocal terms that during the previous year a genuine firm was in existence. That finding has not been found to be erroneous either by the Commissioner in any respect. The only breach of condition which the Commissioner has referred to in his order is of the proviso (1) to section 187 as it existed during the relevant assessment year and has been referred to hereinabove. We have found that provision has relation to the assessment subsequent to the grant of registration and is a part of the obligation of the Assessing Officer to find out for the purposes of facilitating the assessment of the partners to allocate and apportion the income of the firm amongst the partners in the previous year who were entitled to receive the same. This has to be read in the context of the provision which requires that in case there is a change in the constitution of the firm at the time when assessment is being made, the assessment has to be made on the reconstituted firm. Obviously in such event though the assessment is against the reconstituted firm, assessment of period during which the firm existed in its earlier form may be having different partners and different profit-sharing ratio. Since the assessment is of the income of the previous year though in the hands of the same entity constituted by different persons or in a different ratio, the computation of income must be confined to the existing realities during the previous year relevant to the assessment year for which income is being assessed with reference to law in force during the relevant assessment year. It is to give effect to the object of maintaining the continuity of the assessable unit and uniformity and determining the liability of those persons who have actually earned the income and are liable to pay tax during the assessment year in question that the provision has been enacted but it has no relation about the question of genuineness of the firm which alone is the relevant consideration for the purpose of finding that the registration has been granted erroneously or rightly.
The conclusion to which we reach irresistibly is that on the facts found by the Commissioner of Income-tax as affirmed by the Tribunal, registration of the firm could not have been cancelled in law. The correctness of that finding whether the retiring partner was entitled to a share in the profit of the firm on the date of his retirement which is dependent upon the premises of the agreement and application of the ratio in Ashokbhai Chimanbhai's case (1965) 56 ITR 42 (SC) may have bearing on the question whether the assessment of the firm which was registered was erroneous or prejudicial to the interests of the Revenue or not, but since that controversy has not been raised before us with reference to the assessment and is not required for the present purposes, we do not examine the correctness of that findings.
In view of our discussion above, we answer the question as refrained by us in the negative, that is to say, in favour of the assessee and against the Revenue. Reference stands disposed of accordingly with no order as to costs.
M.B.A./1799/FC Reference answered.