Substantive compliance for firm registration: profits allocated to reserve satisfied the credit requirement despite no separate partner entries.

Renewal of a firm's registration could not be refused merely because the partners' profit shares were not separately credited in each individual account. The court treated rule 6 of the Income-tax Rules, 1922 as satisfied where the profits were ascertained in accordance with the partnership shares and taken to reserve, because ownership in the profits had been severed and the shares had been identified. Separate arithmetical entries in each partner's account were regarded as a matter of form, not substance. The position was tested on the facts existing on the application date, and later division of profits was held irrelevant.

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Issues: Whether renewal of registration of a firm could be refused merely because the partners' shares of profit, though ascertained and entered in the reserve account, were not separately credited in each partner's individual account under the prescribed rule.

Analysis: The requirement under rule 6 of the Income-tax Rules, 1922, was held not to demand a rigid formality of immediate credit in each partner's separate account. It was sufficient if the profit for the relevant year had been allocated in accordance with the partnership shares and taken to reserve, so that the ownership in the profits had been severed and the shares of the partners had been ascertained. The absence of separate arithmetical entries in each individual account was treated as a matter of form, not substance. Subsequent division in a later year was also held irrelevant, because the application had to be judged on the facts existing on the date of the application.

Conclusion: Renewal of registration could not be refused on the ground that the profits were credited to the reserve account instead of to the individual accounts of the partners. The requirement of the rule was satisfied, and the answer to the reference was in the affirmative, in favour of the assessee.

Final Conclusion: The firm's entitlement to renewal of registration was upheld on a substantive compliance approach, and the statutory condition was treated as satisfied by ascertainment and allocation of the partners' shares.

Ratio Decidendi: Where the partners' shares in the profits are duly ascertained and the profits are taken to reserve in accordance with those shares, the requirement that profits be divided and credited is met, even if separate credit entries are not made in each partner's individual account.

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