Income-tax---

----Firm---Registration---Firm not maintaining regular books of account-- Application for registration filed in Form No.11 alongwith return of income and statement of account showing profit-sharing ratio among partners as per partnership deed---Profits divided orally among partners as per profit-sharing ratio stated in partnership deed---Firm entitled to registration---Indian Income Tax Rules, 1962, Form No. 11.

For the assessment year 1975-76, the assessee-firm filed an application for registration in Form No. 11 of the Income Tax Rules 1962, with a copy of the partnership deed. The assessee was asked to produce evidence whether the profits of the business had been fully apportioned among the partners and credited to their respective accounts. In reply, the assessee stated that the firm was not maintaining any regular books of account and that the partners had divided the business profits equally as per the deed of partnership as was customary. The Income-tax Officer rejected the application for registration on the ground of absence of any records to show that the profits were divided between the partners. On appeal, the Appellate Assistant Commissioner affirmed the order of the Income-tax Officer. On further appeal, the Tribunal found that Form No. ll which was the application for registration did not require immediate division of profits but even future division would be sufficient because the expression used in the application was "profits (or loss if any) of the previous year" would be divided, that a mere declaration that the profits would be divided in future would be sufficient to comply with the conditions prescribed in Form No. 11 and, therefore, held that the assessee-firm was entitled to registration. On a reference:

Held, affirming the decision of the Tribunal, that the assessee-firm was not maintaining any regular books of account, that, therefore, it would not have been possible for the assessee to produce the same and that the profits had been divided orally as per the profit-sharing ratio stated in the partnership deed. However, the assessee had enclosed a statement of account when filing the return evidencing the share of profits and losses divided between partners as per the profit-sharing ratio. The Tribunal which was the highest fact-finding authority had accepted that the profits were divided among the partners as per the profit-sharing ratio in the partnership deed on the basis of the oral evidence tendered by the partners and statement of accounts filed along with the return of the firm. Therefore, the assessee-firm was entitled to registration.

Rao & Sons v. CIT (1965) 58 ITR 685 (Orissa) and Shri Vijayalakshmi Rice Mill Contractors Co. v. CIT (1990) 181 ITR 263 (AP) ref.

C. V . Rajah for the Commissioner,

Nemo for the Assessee.

JUDGMENT

K. A. THANIKKACHALAM, J.---In pursuance of the direction given by thus Court, dated June 27, 1983, in T. C. P. No. 309 of 1982, the Tribunal referred the following question for the opinion of this Court under section 256(2) of the Income Tax Act, 1961.

"Whether, on the facts, and in the circumstances of the case, the Tribunal was correct in law in holding that even though no books of account are maintained and no' clear evidence was produced regarding the division of profits made by the firm among' the partners, the assessee is entitled to registration on the basis of Form No. 1 I filed by it?"

The assessee is a partnership firm. The assessee in the assessment year 1975-76, has applied for registration of the firm. The firm has been constituted with three partners. The application for registration in Form No.11 has been filed on March 31, 1975. The partnership deed in original with a copy thereof has been filed. The assessee was requested to produce evidence to show whether the profit of the business has beep fully apportioned among the partners and credited to the respective accounts. In reply the assessee stated that the firm is not maintaining any regular accounts and that the partners of the firm have divided the business profits equally as per the deed of partnership as was customary. The partners were requested to appear. Two of three partners appeared and deposed that they divided the profit and adjusted at the end of the year and this was only an oral adjustment and there were no accounts. In the absence of any records to show that the profits were divided between the partners, the Income-tax Officer came to the conclusion that the application for registration of the firm cannot be entertained and the firm was treated as an unregistered firm. On appeal, the Appellate Assistant Commissioner accepted the view taken by the Income-tax Officer. On further appeal, the Tribunal held that the assessee is entitled to registration of the firm.

We have heard learned counsel for the Department and perused the records carefully. The fact remains that the assessee--firth filed Form No. 11 find requested registration of the firm. The partnership deed and a copy of the same were filed. The statement showing the division of profits among the partners according to the profit-sharing ratio in the partnership deed was not produced according to the Income-tax Officer. According to the assessee, the firm is not maintaining any regular books of account. But, they are dividing the profits orally as per profit-sharing ratio stated in the partnership deed.

Learned counsel for the Department submitted that in the absence of the account, the Tribunal was not correct in granting registration. It was further submitted that the assessee is expected to file a statement of account when an application for registration under Form No. 11 was filed. In the present case, the assessee neither produced any account books nor produced any evidence to show that the profits were divided among the partners as per the profit-sharing ratio in the partnership deed. Learned standing counsel further submitted that the fact that the statement of account was filed along with tile return of income would not entitle the assessee to ask for registration of the firm when the statement of account was not corroborated with the account books. Learned standing counsel relied on a decision of the Andhra Pradesh High Court in Shri Vijayalakshmi Rice Mills Contractors Co. v. CIT (1990) 181 I'm 263, where the Andhra Pradesh High Court pointed out that counsel for the assessee submitted that alongwith the return, the assessee has filed copies of accounts showing distribution of profits and losses between the members and, therefore, the assessee-firm is entitled to registration. While dealing with that aspect, the Andhra Pradesh High Court held that inasmuch as the assessee failed ;o satisfy the Income-tax Officer with regard to the sharing of the profits in the manner specified in the partnership deed, it is not possible to grant registration in favour of the firm. Relying on this decision, learned standing counsel submitted that to the present case also me assessee has not filed any account books the statement made by the partners that the profits were divided between them according to the profit-sharing ratio Therefore, learned standing counsel Submitted that the 'Tribunal was not correct in coming to the conclusion that the assessee-firm is entitled to registration.

It is no doubt true that while Form No. 11 was field for registration of the firm, no statement of account was filed and no account books were produced. According to the assessee, they are dividing the profits orally in accordance with the partnership clean Further, according to the assessee, the evidence of sharing of profits can be seen from the memo of income filed with the return of income. Therefore, the assessee could be said to have satisfied the conditions required for registration of the firm. The Tribunal pointed out that Form No 11 which is the application for registration does not require immediate division but even a future division will be sufficient because the expression used in para.4 of this application is "profits (or loss if any) of the previous year" will be divided. According to the Tribunal, a mere declaration that the profits will be divided in future would be sufficient to comply with the conditions prescribed in Form No. 11. In support of this line of reasoning, the Tribunal relied on a decision of the Orissa High Court to Rao & Sons v. CIT (1965) 58 ITR 685, wherein it has been held (headnote) "that even when an assessee had prepared a statement in a typed sheet of paper showing how the total loss was distributed among the partners in proportion to the shares and the specific amounts were duly debited to the account of each partner, it cannot be said that there was no evidence of division of losses and registration of the firm should have been allowed".

According to the facts arising in the present case, when the return of the firm was filed the assessee had enclosed a statement of account showing the profits and losses divided between the partners as per the profit-sharing ratio. In the quantum appeal, the Tribunal accepted the statements filed by the assessee and held that the profits as divided between the partners should be accepted for the purpose of assessment on the firm. The application for registration under Form No. 11 was filed by the assessee alongwith return of the firm and with the statement of account and if that is taken into account that 'Would show that the assessee has shown how the profits were divided between the partners its per the profit-sharing ratio. The Tribunal never doubted the statement of account filed by the assessee. The Tribunal also never asked the assessee to produce the accounts to verify the statement, though the assessing authorities requested the assessee to produce the account books. When, according to the assessee-firm, it is not maintaining the regular account books, it would not have been possible for it to produce the same. But, the Tribunal that is the highest fact-finding authority accepted that the profits were divided among the partners as per the profit-sharing ratio in the partnership deed on the basis of the oral evidence tendered by the partner and the statement of account filed alongwith the return of the firm. When the Tribunal on analysis of the facts came to the abovesaid conclusion, it is not possible to take different view by this Court while exercising its jurisdiction of rendering its opinion. According to the facts arising in Shri Vijayalakshmi Rice Mill Contractors Co. v. CIT (1990) 181 ITR 263 (AP), the Income-tax Officer asked the assessee to produce the accounts. When the accounts were not produced, the Income-tax Officer drew an adverse inference, which adverse inference was confirmed by the High Court. But, in the present case, when both the quantum appeal as well as the appeal filed on rejection of the application in Form No. 11 came up. for consideration, the Tribunal accepted the statement of account 'filed by the assessee and acted upon that basis. Therefore, in the present case, the decision rendered by the Andhra Pradesh High Court in Shri Vijayalakshmi Rice Mill Contractors Co. v. CIT (1990) 181 ITR 263, would render no assistance. In view of the foregoing reasons we consider that there is no infirmity in the order passed by the Tribunal in directing the assessing authority to grant registration to the firm for the assessment year 1975-76, In that view of the matter, we answer the question referred to us in the affirmative and against the Department. No costs.

M.B.A./4218/FC Question answered.