Strict compliance with partnership deed and tax rules governs firm registration when divisible profits are not fully allocated.

Entitlement to firm registration under section 26A of the Income-tax Act, 1922 depended on strict compliance with the partnership deed and prescribed rules under section 59. Where the deed contemplated division of all divisible profits but part of those profits was carried forward instead of being divided or credited in accordance with the instrument, the statutory condition for registration was not met. The Andhra Pradesh HC held that non-division of any part of the divisible profits defeated registration, and authorities concerning reserve funds or different facts did not control the issue.

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Issues: Whether a firm is entitled to registration under section 26A of the Income-tax Act, 1922, when the whole of its divisible profits are not divided among the partners.

Analysis: Registration under section 26A depended upon compliance with the prescribed rules framed under section 59. The scheme of the Act and the rules required that the profits of the relevant accounting year be divided or credited in accordance with the partnership deed and the prescribed form. Where the partnership deed itself contemplated division of all profits and a portion of the divisible profits was carried forward instead of being distributed according to the instrument, an essential requirement for registration was not satisfied. The cited authorities on reserve funds or different factual settings did not govern the present case, since the issue here was non-division of part of the divisible profits in breach of the statutory and contractual scheme.

Conclusion: The firm was not entitled to registration unless the divisible profits were wholly divided in accordance with the partnership instrument and the rules.

Ratio Decidendi: Entitlement to registration of a firm under section 26A requires strict compliance with the prescribed statutory rules and the partnership deed, including full division or crediting of the divisible profits of the relevant year; any unallocated part of such profits defeats registration.

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