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- Validity of cancellation of registration to a firm under section 263 of the Income-tax Act, 1961 due to incorrect division of profits according to the partnership deed. Analysis: The judgment of the High Court of Rajasthan pertains to a reference arising from the Income-tax Appellate Tribunal's order regarding the cancellation of registration to a firm for the assessment year 1977-78. The core issue revolved around whether the Tribunal was justified in canceling the order of the Commissioner of Income-tax made under section 263 of the Income-tax Act, 1961. The Commissioner initiated proceedings under section 263 after finding that the profits had not been divided by the assessee in accordance with the share ratio as stated in the partnership deed. The Commissioner contended that the Income-tax Officer erred in granting registration to the firm due to the incorrect profit division. However, the Tribunal, on appeal, held that the profit distribution was a result of a bona fide mistake and that there was no intentional alteration in the share ratio, deeming the firm as genuine. The Tribunal considered rectification entries and referred to a precedent from the Allahabad High Court to support its decision. In the cited case, a minor deviation in profit division occurred due to an inadvertent fault, leading to a similar situation where the firm's genuineness was upheld despite the error. The High Court distinguished this case from another precedent where a portion of profits was not divided among partners as per the partnership deed. In the present case, the High Court concurred with the Tribunal's findings that the profit distribution discrepancy was a technical mistake rectified promptly. The Court emphasized that the genuineness of a firm hinges on its actual existence and adherence to the partnership agreement, highlighting that an honest mistake in profit division does not undermine the firm's legitimacy. Ultimately, the High Court upheld the Tribunal's decision to cancel the Commissioner's order under section 263, ruling in favor of the assessee and against the Revenue. The judgment underscores the significance of factual findings in determining the genuineness of a firm, particularly in cases where inadvertent errors in profit distribution are promptly rectified to align with the partnership deed.
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