1987 (7) TMI 52 - HC - Income Tax

Summary

Issues Involved:
1. Whether the registration already granted to the assessee was rightly cancelled under section 186(1) of the Income-tax Act, 1961.
2. Whether the continuation of registration for the assessment year 1976-77 was rightly refused.

Issue-wise Detailed Analysis:

1. Whether the registration already granted to the assessee was rightly cancelled under section 186(1) of the Income-tax Act, 1961:

The court noted that the Income-tax Officer (ITO) refused to allow the continuation of registration for the assessment year 1976-77, rather than cancelling an already granted registration. The ITO discovered that Pawan Kumar, who was a minor when the partnership deed was executed, attained majority on June 19, 1969. The partnership deed did not specify how losses would be distributed after Pawan Kumar attained majority. Consequently, the ITO refused the continuation of registration for the assessment year 1976-77, as the redistribution of shares in losses was not shown in the partnership deed. The Tribunal upheld the ITO's decision, stating that no genuine firm existed with the constitution specified in the instrument of partnership after the minor attained majority.

2. Whether the continuation of registration for the assessment year 1976-77 was rightly refused:

The court emphasized that under sections 184, 185, and 186 of the Income-tax Act, 1961, registration can only be granted to a genuine firm. A genuine firm must continue with the constitution specified in the instrument of partnership and with the same share ratio in profits and losses. The court highlighted that the pivotal point of these sections is the genuineness of the firm. If a firm ceases to be genuine, the registration already granted can be cancelled.

In this case, Pawan Kumar attained majority, and the partnership deed did not specify how the losses would be distributed after this event. The court noted that the change in the loss-sharing ratio was not evidenced by any partnership deed. Therefore, the firm ceased to be a genuine firm, as the change in the shares of the partners after the minor attained majority was not evidenced by any instrument. The court referred to the Full Bench decision in Badri Narain Kashi Prasad v. Addl. CIT [1978] 115 ITR 858, which held that the identity of the partners and their shares in profits and losses must be as specified in the instrument of partnership.

The court rejected the argument that the partners agreed to share the losses in the same proportion as the profits after the minor attained majority, as this change was not evidenced by any partnership deed. The court also dismissed the contention that the statement of Pawan Kumar recorded by the ITO was sufficient to prove the agreement among the partners.

Conclusion:

The court concluded that the Tribunal was right in restoring the order of the ITO, who refused to allow the continuation of registration for the assessment year 1976-77. The court held that the firm ceased to be a genuine firm after the minor attained majority, as the change in the shares in the losses was not evidenced by any instrument. Therefore, the continuation of registration was rightly refused, and the cancellation of registration, even if assumed, was justified. The court answered the question in the affirmative, upholding the Tribunal's decision.