TaxTMI 
TaxTMI 
1994 (11) TMI 18
X X X X Extracts X X X X
X X X X Extracts X X X X
....stion " whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in holding that the Commissioner's order passed under section 263 of the Income-tax Act, 1961, in cancelling the registration granted to the firm under section 185 was not justified and was not valid in law ? " and eventually pursuant to a direction of this court in T. C. P. Nos. 65 and 66 of 1980, the Tribunal made the reference. The Revenue's case in this behalf is that the profits of the firm were not divided amongst the partners in accordance with the deed of partnership dated December 29, 1972. For the assessment year 1974-75, the divisible book profits amounted to Rs. 99,143. The firm transferred Rs. 39,143.14 to one Vembathu Ayyanar Swamy Fund and divided the balance amongst the partners, in accordance with the profit-sharing ratio. The firm also kept separate from the profits actually handed over to the partners as shown in the books as a reserve fund. According to the Revenue any reserve fund was not contemplated in the deed of partnership of the assessee. The transfer to the alleged charity of one Vembathu Ayyanar Swamy Fund was contrary to the partnership deed. The reg....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sment under sub-section (1) of section 182 as if the firm were a registered firm ; and, where the procedure specified in this clause is applied to any unregistered firm, the provisions of sub-sections (2), (3) and (4) of section 182 shall apply thereto as they apply in relation to a registered firm. " A special provision has been made for the registration of firms, under section 184, and under section 185 of the procedure as to the registration on receipt of application, has been contemplated. The registration already granted in accordance with the procedure under section 185 can be cancelled on the grounds and reasons as stipulated under section 186, which reads as follows : " 186. (1) If, where a firm has been registered, or its registration has effect under sub-section (7) of section 184 for an assessment year, the Income-tax Officer is of opinion that there was during the previous year no genuine firm in existence as registered, he may, after giving the firm a reasonable opportunity of being heard and with the previous approval of the Inspecting Assistant Commissioner, cancel the registration of the firm for that assessment year : Provided that no such cancellation shall be ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....his opinion there was during the previous year no genuine firm in existence and for the reasons, as are spelled out in section 144 of the Act for the best judgment assessment, that is, if the assessee has failed to make the return required by any notice given under sub-section (2) of section 139 and has not made a return or a revised return under sub-section (4) or sub-section (5) of that section, or failed to comply with all the terms of the notice issued under sub-section (1) of section 142 or failed to comply with a direction issued under sub-section (2A) of that section, or, having made a return, failed to comply with all the terms of the notice issued under sub-section (2) of section 143. Assessment of a registered firm is done on the total income of the firm, that is, the income-tax payable by the firm itself and the share of each partner in the income of the firm. In the case of an unregistered firm, it is determined on the basis of the total income of the firm or the aggregate amount of tax payable by the firm, if it were assessed as a registered firm and the tax payable by the partners individually, if the firm were so assessed, would be greater than the aggregate amount o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....alf. In case the Income-tax Officer has failed to exercise such a discretion, the Commissioner in exercise of his revisional power, may act and require the assessee to produce evidence so that the correctness and completeness of the return filed by it can be verified. We have made a brief study of the relevant provisions of the Act with a view only to ensure that exercise of revisional power by the Commissioner should not become a fiat, but should be within the bounds of law and satisfy the need of fairness in administrative action and fair play and full compliance with the requirements of the principles of natural justice as in quasi-judicial proceedings and in making a quasi-judicial order. Section 263 has envisaged a condition that the Commissioner can exercise his power of revision of the order passed by the Income-tax Officer only if the order is prejudicial to the Revenue and in a case where the order passed by the Income-tax Officer is erroneous. We do not intend to give any limited meaning to the word " erroneous ", as an order may be called " erroneous " if it is passed in ignorance or in violation of any law as well as when it is passed without taking into consideration ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nally received an application by two of the partners that they were withdrawing their signatures in the application for renewal of the registration as the profits of the previous year were not distributed according to the deed of partnership and the certificate of registration required under rule 4(1) of the Income-tax Rules, 1922, framed under the Indian Income-tax Act, 1922, had never been granted as required by law on the back of the partnership deed. Therein they further stated that, as the certificate under rule 6 had not been granted by the assessee in accordance with law, the firm was not entitled to registration under rule 6 of the Rules. The Income-tax Officer held that the firm had earned considerable black market profits and the same had not been distributed amongst the partners according to the partnership deed and, therefore, the firm was not entitled to the renewal of registration. He further opined that the application for registration stood withdrawn. On the basis of those conclusions, he refused to renew the registration of the firm and taxed the firm in the status of an association of persons. The Appellate Assistant Commissioner upheld the decision of the Income-....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on behind rule 6 was that, at the relevant time, the registered firm as such was not taxable. Only the partners of the firm could be taxed. That being so, if a portion of the profits earned by the firm was not divided amongst the partners or credited to their accounts, to that extent, the profits earned by the firm escaped assessment. Therefore, the certificate contemplated by rule 6 is not a mere formality. It has a definite purpose. If a portion of the profits earned by the firm was not actually divided amongst the partners or credited to their accounts, then the only course open to the Income-tax Officer was not to register that firm and to tax the partners of the firm as an association of persons. By giving a false certificate that the profits earned by the firm had been divided or credited in the manner shown in the application, the assessee-firm was trying to evade tax. Hence, we must hold that the application for renewal of registration made by the assessee did not comply with the conditions prescribed in paragraph 3 of rule 6. Hence, the Income-tax Officer was justified to refuse to renew the registration." Now, it is pertinent to quote from the aforesaid judgment of the S....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rofits of the firm entered in its account books had been distributed, the profits earned but not entered in the account books have not been divided or credited in the account books. " From that, the Supreme Court has held (at page 179) : " . . . it follows that the certificate given in the application for renewal of registration is not a true certificate and further that a substantial portion of the profits earned has not been divided. " The judgments of the different High Courts, which were brought to the notice of the Supreme Court were noted, but the court found that they had no bearing on the point in issue and said (at page 182) : " we have not gone into the question whether all or any of them were correctly decided or not. " The Andhra Pradesh High Court in the case of Variety Hall and Ramakrishna Textiles v. CIT [1972] 84 ITR 202, has taken the view that the failure to disclose certain income and to divide the same amongst the partners in accordance with the terms of the partnership deed does not by itself disentitle a firm to be registered as long as the partnership is evidenced by an instrument of partnership and there is no reason to doubt the genuineness of the part....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s concerned, it is seen that the share of each of the partners was carried to the reserve fund and each partner was shown as having contributed his share to the reserve fund. A Bench of the Kerala High Court in the case of St. Joseph's Provisions Stores v. CIT [1962] 45 ITR 380 has indicated that the partners of a firm, who had resolved that the profits of the firm as disclosed in the profit and loss account need not be divided and credited in the accounts of the partners, but should be credited to a reserve account in which the share of each partner therein should be stated and the profits were accordingly taken to the reserve account, it did not violate rule 6 aforementioned. It is held in this judgment that the absence of entries in the separate accounts of each partner was not fatal. The requirement of rule 6 was met when the profit was taken to the reserve fund showing the partners' shares separately and indicating what was the contribution of each partner to the reserve fund and the application for registration was not liable to be rejected on the ground that rule 6 had not been complied with. The learned judge, who delivered the judgment in Chintalapatti Ranga Naikulu's case....