TaxTMI 
TaxTMI 
1964 (1) TMI 61
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....nas share and his mother having two annas share. The firm was registered under section 26A for the assessment years 1942-43 to 1947-48. For the assessment year 1948-49 the partners applied for renewal of registration which was refused. A firm if it is registered under the Act has certain advantages in the matter of assessment to income-tax and section 26A lays down the procedure to be followed by a firm in order to get registered. It is as follows: "(1)Application may be made to the Income-tax Officer on behalf of any firm, constituted under an instrument of partnership specifying the individual shares of the partners, for registration ... (2)The application shall be made by such person or persons, and at such times and shall contain such particulars and shall be in such form, and be verified in such manner, as may be prescribed; and it shall be dealt with by the Income-tax Officer in such manner as may be prescribed." Rules 2 to 6B of the Income-tax Rules deal with registration of firms. Rule 2 lays down that a firm is entitled to registration if it is constituted under an instrument of partnership specifying the individual shares and makes an application sign....
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.... form of application given in the rule which has three clauses, clause 2 being the statement that the instrument of partnership was registered on such and such date and the certificate that the constitution of the firm and the individual shares of the partners as specified in it remain unaltered and clause 3 being a certificate that "the profits of the previous year were divided or credited as shown below", followed by a statement showing particulars of the apportionment of the income, profits or gains. The statement has several columns including column 1 and column 6 as in the Schedule of the prescribed form for an application under section 4. On receipt of an application under rule 6 "the Income-tax Officer may, if he is satisfied that the application is in order and that there is or was a firm in existence constituted as shown in the instrument of partnership, grant to the assessee a certificate" in a certain form and "if the Income-tax Officer is not so satisfied, he shall pass an order in writing refusing to renew the registration"; this is rule 6A. Rule 6B empowers an Income-tax Officer on being satisfied that a certificate granted under rule 4 or rule 6A had been obtained "w....
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.... assessee's instance the Tribunal stated the case. The question formulated by the Tribunal is not proper; it suggests that a firm which has distributed all its profits including undisclosed profits is entitled to registration regardless of other facts, which is not correct. In order to be entitled to registration it must make an application in the prescribed form and within the prescribed time; until it does so it cannot be said to be entitled to registration. In this case registration was refused on the ground that the Income-tax Officer had discretion to refuse it even if the application was in time and in order and not on the ground that the application for registration was withdrawn by partners of the second group. There was an application by partners of the second group withdrawing their signatures on the application for renewal and the Income-tax Officer had taken it into consideration for refusing a renewal of registration, but the Tribunal maintained its order only on the ground that the undisclosed profits had not been distributed among the partners and not on the ground that the application for registration had been withdrawn by some of them. While rule 4 regarding....
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....of the lies told by him in the application. That the statements made or the certificate given in the application is incorrect would be a ground for refusing renewal. There is thus sufficient justification for the Government's deliberately using the word "may" in the rule and the rule must mean that if the satisfaction is not there the registration cannot be renewed at all and that if it is there, it may be renewed provided there do not exist circumstances justifying refusal. In other words, non-existence of the satisfaction is a sufficient ground for refusal to renew while existence of the satisfaction permits, but does not confer a right to, renewal and "in order" means correct in form. The interpretation that "in order" means correct in form is consistent with the interpretation that the first paragraph of rule 6A confers discretion upon the Income-tax Officer. If the application is in order as so interpreted but is incorrect in substance the Income-tax Officer may exercise his discretion against renewal. As he has discretion and is not bound to renew the registration, "in order" need not be interpreted to mean "correct in form and substance". The registration will not be ren....
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....rofits or loss of the particular year should be mentioned. What is meant by "share" in the heading of the column is made clear by the words "annas and pies in the rupee"; only the share in a rupee of profits or loss is to be stated and not the actual amount of the share in the profits or loss of the year. Nothing is to be gained by the actual amount being mentioned instead of the fractional share in a rupee. Undoubtedly, there is a difference between stating the amount of the share in the actual amount of the profits or loss and stating the share in a rupee of profits or loss; if the amount is stated it means that nothing more has been distributed to the partner and that if the correct amount of the profits during the year is more no share in the excess of the profits has been paid to the partner. On the other hand, if only the fractional share in a rupee of profits or loss is entered in the column it means that whatever is the correct amount of profits the partner has received his share in it. But the statement in clause 3 of the application that each partner has received either by payment or through credit his share in the profits of the year amounts to the statement that each pa....
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....be deducted when they calculate the profits for distribution among themselves, but an Income-tax Officer will not deduct them for assessment purposes. The forms of the applications do not show which profits, profits for purposes of distribution or profits for purposes of assessment, are to be distributed among the partners. Fractional shares of the partners in a rupee of profits can be stated in the applications even though the correct amount of the profits is not known but the actual amount received by each partner cannot be stated. Then there may be bona fide doubts whether certain receipts are income or capital receipts and whether the partnership is entitled to deduct certain expenses or not; the correct amount of the profits for assessment purposes cannot be determined unless these doubts are resolved. Finally the accounts maintained by a partnership may be rejected by an Income-tax Officer under section 13 and he may estimate the amount of its profits upon such basis and in such manner as he may determine. The Government could not have expected the partners to certify that they had distributed or credited the correct profits of the partnership and to state correctly the amoun....
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....ld certainly be a relevant matter to be taken into consideration by the Income-tax Officer when he has to exercise his discretion in the matter of granting or refusing registration or renewal. When the Government made a right to registration or renewal dependent upon the partners giving a true certificate the incorrectness or incompleteness of their certificate would be a just ground for refusal to register or renew. It has been found by the Tribunal that the actual or real profits had not been divided in accordance with the partnership deed. The President of the Tribunal, to whom the case was referred on a difference of opinion between the two Members of the Tribunal, relied upon the "finding of fact ... that Sewak Ram and Jagrani Devi had not received their entire share of the black market profits" and held that the certificate given by the partners was "a wrong certificate". It was on this finding of fact, and not on the ground that certain profits had been cancealed by the assessee, that the discretion was exercised against renewal. Concealment of a portion of the profits would not have rendered the certificate incorrect if they in fact had been distributed or credited among....
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....n for registration ... is irrelevant to the issue, which the Income-tax Officer has to decide under rule 4, whether or not a firm exists as stated in the instrument . . ." These observations partly support, and partly conflict with, the view that we take. The learned Chief Justice dealt with rule 4 and not with rule 6A and the law laid down by him in regard to rule 4 which uses the word "shall" may not be said to be applicable to rule 6A which uses the word "may". Even as regards rule 4 we respectfully consider it preferable to hold that when the satisfaction exists it confers discretion, instead of imposing an obligation, to register. Further what was found in that case was that some profits were concealed and not that they were not distributed in accordance with the certificate; we have emphasised the distinction between (1) distributing whatever profits have accrued and giving a wrong figure of them and (2) giving a wrong amount and not distributing the excess. The former was the case before the learned Chief Justice whereas the case before us is of the latter class. In Commissioner of Income-tax v. D'Costa Brothers [1963] 49 ITR 1 Tambe and Desai JJ. denied that a par....
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.... that in calculating the profits the firm failed to credit interest on the capital investment was not a ground for refusing to register. What was decided by Ansari C.J. and Govinda Menon J., in St. Joseph's Provisions Stores v. Commissioner of Income-tax [1962] 45 ITR 380 was that "the absence of entries in the separate accounts of each partner is not fatal, and the requirement of rule 6 is met where the profit is taken into the reserve fund by showing the partners' shares therein and indicating what is the contribution of each partner to the reserve fund". They treated the crediting to the reserve account of the profits after specifying the share of each partner in them as crediting them; in the instant case there is a specific finding of fact that a portion of the profits was not distributed among the partners at all. They did not hold that renewal could not be refused on the ground that there was no distribution or crediting of the profits. This decision was distinguished by Chandra Reddy C.J., and Mohammad Mirza J., in Chintalapati Ranga Naikulu v. Commissioner of Income-tax [1963] 48 ITR 968 , holding that "excluding any part of the divisible profits from division i....
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....on does not exist. We respectfully agree with their observation: "If the application does not conform to the procedure indicated in the rules, the Income-tax Officer should surely reject the application. But he cannot capriciously and without proper basis decline to register the partnership." This does not show that the existence of the satisfaction leaves him without discretion. No question of mala fides in calculating and distributing the profits arose in that case. The question that came up for decision before Chagla C.J. and Tendolkar J. in Atmaram Bhogilal v. Commissioner of Income-tax [1952] 22 ITR 305 , was whether a partnership entered into between Jaswant Lal and his father after their alleged separation was a genuine partnership or not and the answer depended upon whether there was separation between them prior to the alleged partnership. We have nothing to do with that question in the instant case; if there did not come into existence a genuine partnership, registration had to be refused but what the learned judges held was that there was a genuine partnership. They recognised that "it is left to the discretion of the Income-tax Officer whether to register....
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....n finding that no genuine partnership existed and it may be said that now with the added requirement that the Income-tax Officer must be satisfied about the existence of a genuine partnership, there is no longer any scope for the argument. Our reply would be that the requirement was added in order to remove the matter from the discretion if no genuine partnership existed. That a partnership comes into existence by a verbal agreement confirmed by an instrument of partnership drawn up after the expiry of the relevant previous year is entitled to registration was the ratio decidendi of R.C. Mitter & Sons v. Commissioner of Income-tax [1959] 36 ITR 194 ; [1959] Supp. 2 SCR 641 decided by the Supreme Court. Sinha J. (as he then was) laid down the essential conditions to be fulfilled by a partnership in order that it may be entitled to registration but did not say that if they were fulfilled it was bound to be registered. By fulfilling the conditions it became qualified to be registered but if there are other facts on account of which it was disqualified, registration could be refused. The ground on which registration was refused was found by the learned judges to be unsound and that ....