The judgment of the court was delivered by
HEGDE J.---This is an appeal by certificate. It arises
from a decision of the Allahabad High Court. The appellant is the assessee and
the concerned assessment year is 1948-49.
The assessee is a firm constituted under an instrument of
partnership dated April 30, 1947. The shares of the partners in the profit and
loss of the firm as mentioned in that deed are as follows :
1 . L. Khanjan Lal 4 as.
2. L. Lalloo Ram 2 as.
3. L. Dwarka Prasad 2 as.
4. L. Ram Lal 2 as.
5. L. Sewak Ram 4 as.
6. Smt. Jagrani Devi 2 as.
Lallu Ram, Dwarka Prasad and Ram Lal are the children of
Khanjan Lal. Sewak Ram is the son of Jagrani Devi. The first group has 10 as.
share in the profit and loss of the firm and the second group has 6 as. share.
The assessee firm was registered for the assessment year
1947-48. On July 12, 1949, the partners of the firm an lied to the Income-tax
Officer for renewal of the registrations for the assessment year 1948-49. That
application was signed by all the partners. To that application they appended a
certificate to the effect that " profits of the previous year were divided
or credited as shown below... " On November 5, 1949, the partnership was
dissolved under a deed of distribution dated November 9, 1949. One of the
clauses in that deed provides :
" But if an amount which was not entered in the books
at the time of settlement is found then only that person will be accountable for
it through whom the money was received or paid. None of the parties will have
any objection to it."
On October 5, 1950, the first four partners made a
disclosure statement to the Income-tax Officer to the effect that the firm had
earned Rs. 15,000 by way of profits outside the books. In that disclosure
statement, they further stated that those profits had been divided between the
partners. On December 9, 1950, Sewak Ram, one of the partners, stated on oath
before the Income-tax Officer that he and his mother, Jagrani Devi, were not
given full share of the profits of the business earned by the firm in Samvat
year 2005. He further stated that the entire profits earned In that business
carried on in the previous year were not recorded in the books and, the first
four partners had given to him and his mother only their shares of those profits
which were recorded in the books. Therein he sought to withdraw the application
for registration because all the profits earned had not been divided according
to the shares. According to Sewak Ram, the profits earned and not entered in the
accounts amounted to Rs. 1,13,571. From the aforementioned statements, it is
clear that the firm was trying to evade tax on a portion of the profits earned
by it by not bringing the same into their books.
On March 31, 1951, Sewak Ram sued the first four partners
for rendition of accounts. In that suit he estimated his share of profits in the
amount that had not been entered in the account books at Rs. 50,000. Ultimately,
the suit was compromised and Sewak Ram withdrew his suit. In his application to
withdraw the suit, he stated that he wanted to withdraw the suit " in view
of the circumstances of the above case ", an expression of utmost
ambiguity. Therein he stated that he is not entitled to get any more amount from
the defendants.
On March 15, 1952, Sewak Ram and his mother, Jagrani Devi,
gave an application to the Income-tax Officer stating that they are withdrawing
their signatures on the application for renewal of 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 (to be hereinafter referred to as " the Rules "), framed
under the Indian Income-tax Act, 1922 (in brief " the Act "), 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 for
registration under rule 6 of the Rules.
On the basis of the material before him, the Income-tax
Officer came to the conclusion 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 for
renewal of the registration. He further opined that the application for
registration had 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
association of persons. In appeal, the Appellate Assistant Commissioner upheld
the decision of the Income-tax Officer.
The assessee took the matter in appeal to the Income-tax
Appellate Tribunal. The two Members who heard the appeal concurred with the
Income-tax Officer and the Appellate Assistant Commissioner that a substantial
portion of the profits earned by the firm had not been entered in the books.
They also held that those profits were not distributed amongst the partners
according to the instrument of partnership. On the basis of those findings the
Judicial Member held that the firm was not entitled to the renewal of
registration asked for, but the Accountant Member opined that inasmuch as the
profits that had been entered in the books had been distributed, there was
compliance with the provisions of the " Act " as well as the Rules. In
view of this difference of opinion between the two Members, the matter was
referred to the President of the Tribunal under section 5A(7) of the Act. The
President agreed with the Judicial Member that the firm was not entitled to have
the renewal of the registration asked for. Thereafter, at the instance of the
assessee, the Tribunal submitted the following question to the High Court under
section 66(1) of the Act :
" Whether the assessee-firm which had distributed its
book profits amongst the partners according to the instrument of partnership but
which had not distributed the profits earned by it in the black market amongst
the six partners in accordance with the instrument of partnership was entitled
for renewal of registration for the assessment year 1948-49 ? "
The High Court answered that question in favour of the
department. Hence this appeal by the assessee-firm.
Before examining the scope of the question submitted to
the High Court under section 66(1) of the Act, we may mention that the question
whether the application for renewal of registration stood withdrawn or not is
not before us. On that question, the Judicial Member of the Tribunal took the
view that the said application stood withdrawn but the Accountant Member did not
agree with that view. The President of the Tribunal did not express any opinion
on that point.
Now, turning to the question referred to the High Court,
that question is based on two findings of fact which are no more open to
question. Those findings are : (1) that the firm had distributed its book
profits amongst the partners according to the instrument of partnership, (2) but
it had not distributed the profits earned by it in the black market amongst the
six partners in accordance with the instrument of partnership.
Mr. Ramachandran, the learned counsel for the assessee,
sought to assail the correctness of those findings on the ground that those
findings are not supported by evidence, but we did not permit him to go into the
same as that question is not before us. We are bound by those findings. Having
said that much, we shall now turn to the relevant provisions in the Act and the
Rules. Section 26A of the Act reads :
" (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 for the
purposes of this Act and of any other enactment for the time being in force
relating to income-tax or super-tax.
(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."
This court has ruled in Agarwal & Co. v. Commissioner
of Income-tax that the conditions of registration prescribed by section 26A and
the relevant Rules are :
1. On behalf of the firm, an application should be made to
the Income-tax Officer by such person and at such times and containing such
particulars, being in such form and verified in such manner as are prescribed by
the Rules ;
2. The firm should be constituted under an instrument of
partnership ;
3. The instrument must specify the individual shares of
the partners ; and
4. The partnership must be valid and must actually exist
in the terms specified in the instrument.
Therein it was further laid down that if those conditions
are fulfilled, the Income-tax Officer is bound to register the firm. The same
rule will apply in the case of renewal of registration. In this case we are
primarily concerned with the question whether the application made by the firm
is in accordance with the Rules prescribed. The Rules with which we are
concerned in this appeal is paragraph 3 of rule 6 and rule 6A. Paragraph 3 of
rule 6 provides that the partners should append the following certificate to
their application for renewal of registration :
" We do hereby further certify that the profits (or
loss, if any) of the previous/year or period up to the date of dissolution
were/will be divided or credited as shown below . . . "
Rule 6A provides that " 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
signed and dated by him in the following form . . . " It further provides :
" If the Income-tax Officer is not so satisfied, he
shall pass an order in writing refusing to renew the registration of the
firm."
Now the sole question for decision is whether the
application made in this case complied with the requirements of paragraph 3 of
rule 6. If it did not comply with the requirements of rule 6, the Income-tax
Officer was within his powers in rejecting it. As seen earlier, the finding of
the Tribunal is that though the profits 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 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
had not been divided.
The reason behind rule 6 was that, at the relevant time,
the registered firm as such was not taxable. Only the partners of a 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.
In resisting the above conclusion, Mr. Ramachandran,
counsel for the assessee, relied on certain decisions of the High Courts. The
first decision relied on by him is that of the Bombay High Court in Commissioner
of Income-tax v. D'Costa Brothers. Therein, the court held that the Income-tax
Officer was not entitled to reject the application for registration of the deed
of partnership of the assessee-firm on the ground that the household expenses of
the partners were debited to the profit and loss account of the firm. Therein
there was no contention that all the profits earned were not distributed. The
only question was whether the household expenses could have been deducted before
dividing the profits. In other words, the question was whether the household
expenses was a proper deduction to be made in the circumstances of that case
before dividing the profits. Hence, that decision has no bearing on the question
under consideration.
He next placed reliance on the decision of the Punjab High
Court in Commissioner of Income-tax v. Sat Ram Gian Chand. Therein the partners
first estimated the divisible profit and divided the same. The court held that
the division of profit was a matter relating to the internal affairs of the
partnership and had no bearing on the genuineness of the firm and that no
question of law arose from the order of the Appellate Tribunal. The ratio of
that decision has no relevance for our present purpose.
Counsel for the assessee next relied on the decision of
the Madras High Court in N. S. S. Sokkalingam Chettiar and Co. v. Commissioner
of Income-tax. In that case, though there was no provision in the deed of
partnership for payment of salary to any of the partners, some of the partners
were paid a salary in addition to the shares to which they were entitled under
the terms of the partnership and the Income-tax Officer refused to register the
firm on the ground that the profits were not divided in accordance with the
partnership deed as some of the partners took an additional amount out of the
profits in the shape of salary. The court held that, as the partnership was
found to be a genuine one and the application for registration was also in due
form, the mere fact that some partners took some portion of the profits as
salary was not a ground for refusing registration. The question whether a
partner should be paid salary for the services rendered by him is a matter to be
decided by the partners of the firm : so long as their payment is a bona fide
one, the same has to be deducted before the divisible profits are computed.
Hence, the ratio of that decision also does not bear on the facts of the present
case.
Reliance was next placed on the decision of the Madhya
Pradesh High Court in Commissioner of Income-tax v. Madanlal Chhaganlal. In that
case the partnership deed provided that each partner will be entitled to
interest at 6 per cent. per annum on his capital investment and that the profit
and loss will be divided equally among the partners after deducting the interest
payable on the capital advances made by the partners. When the partners made an
application for registration under section 26A of the Act, the Income-tax
Officer refused to register it but the court held that the application was a
valid one and the provision for payment of interest did not in any manner
conflict with the relevant provision. Here again, there is no question of not
dividing any portion of profits earned. That being so, that decision is
irrelevant for our present purpose.
Lastly, reliance was placed on the decision of the Kerala
High Court in St. Joseph's Provisions Stores v. Commissioner of Income-tax.
Therein the partners of the assessee firm resolved that the profits of the firm
as disclosed in the profit and loss account need not be divided and credited in
the profit and loss accounts of the partners, but should be credited to a
reserve account but each of the partners to have an equal share in that amount.
An application for registration of the firm was rejected on the ground that the
firm had not complied with the requirements of rule 6 of the Rules. The court
held 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 into a
reserve fund showing the partners' shares therein and indicating what was the
contribution of each partner to the reserve fund. Therefore, the application for
registration was not liable to be rejected on the ground that rule 6 had not
been complied with. Here again, the profits earned had been divided and they
were credited to the accounts of the partners though the same were credited to a
reserve fund. Hence, the rule laid down in that case is inapplicable to the
facts of the present case. As the above referred decisions do not bear on the
point in issue we have not gone into the question whether all or any of them
were correctly decided or not.
The apprehension of Mr. Ramachandran that our decision
might be taken advantage of by the department for refusing registration of firms
whose return of income or claim for some allowance has not been accepted by the
Income-tax Officer for one reason or the other, appears to us to have no basis.
Herein, we are merely considering the scope of paragraph 3 of rule 6. So long as
the divisible profits had been divided or had been credited to the accounts of
the partners, the requirement of that provision was complied with.
In the result, this appeal fails and the same is dismissed
with costs.
Appeal dismissed
