Partnership registration and unexplained cash credits: later partnership instruments cannot cure earlier years, and unproved credits may be taxed separately.

Registration under section 26A of the Indian Income-tax Act, 1922 required an instrument of partnership to exist and operate during the relevant accounting year; a later memorandum could not validate registration for an earlier year. Unexplained cash credits, where the assessee failed to offer a satisfactory explanation, could be assessed as income from an undisclosed source even if gross profit on business turnover had already been estimated and an addition made for suppressed business income. The burden of explaining facts within the assessee's special knowledge remained on the assessee under section 106 of the Indian Evidence Act, 1872.

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Issues: (i) Whether a firm constituted orally in June 1944 could be registered for the assessment years 1945-46 and 1946-47 on the basis of a memorandum of partnership executed in June 1948. (ii) Whether unexplained cash credits could be assessed as income from undisclosed sources when the gross profit on turnover had already been estimated and an addition had been made towards suppressed business income.

Issue (i): Whether a firm constituted orally in June 1944 could be registered for the assessment years 1945-46 and 1946-47 on the basis of a memorandum of partnership executed in June 1948.

Analysis: Registration under section 26A of the Indian Income-tax Act, 1922 depends on the existence, at or before the commencement of the relevant accounting year, of an instrument of partnership governing the distribution of profits for that year. A later memorandum cannot validate registration for an earlier assessment year when no such instrument existed during the relevant accounting period.

Conclusion: The claim for registration failed and the answer to this issue was against the assessee.

Issue (ii): Whether unexplained cash credits could be assessed as income from undisclosed sources when the gross profit on turnover had already been estimated and an addition had been made towards suppressed business income.

Analysis: If an assessee fails to explain cash credits satisfactorily, the taxing authorities may treat the amount as income of the relevant year. Such credits need not be attributed to suppressed business receipts merely because the assessee carries on business from a known source. Where the explanation is rejected and the credits cannot be linked to the disclosed source, they may properly be assessed as income from an independent undisclosed source. The burden of explaining facts within special knowledge lay on the assessee under section 106 of the Indian Evidence Act, 1872.

Conclusion: The addition of Rs. 23,563 as income from undisclosed sources was legally justified and the answer to this issue was in favour of the Revenue.

Final Conclusion: The reference was answered against the assessee on both questions, with the disputed addition upheld and the refusal of registration sustained.

Ratio Decidendi: For section 26A registration, the partnership instrument must exist and operate during the relevant accounting year, and unexplained cash credits, once the explanation fails, may be assessed as income from an undisclosed source rather than being necessarily treated as suppressed business profit.

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