1983 (2) TMI 44 - HC - Income Tax

Summary

Issues Involved:
1. Entitlement of the assessee-firm to registration for the assessment year 1973-74.
2. Continuation of registration for the assessment year 1974-75.
3. Impact of a partner conducting individual business on the firm's registration.

Detailed Analysis:

1. Entitlement of the Assessee-Firm to Registration for the Assessment Year 1973-74:
The primary issue was whether the assessee-firm, consisting of five partners, was entitled to registration for the assessment year 1973-74. The firm was constituted by a deed dated May 10, 1972, effective from April 1, 1972. The Income Tax Officer (ITO) initially granted registration, finding the firm to be genuine and lawfully constituted. However, the Commissioner of Income-tax, exercising powers under section 263 of the I.T. Act, initiated revision proceedings, arguing that the registration was erroneous and prejudicial to the interests of the Revenue. The Commissioner highlighted that the managing partner, K.C. Thomas, had taken up contract work individually, which should have been considered as the firm's income per clause 13 of the partnership deed and section 16(b) of the Partnership Act. The Commissioner concluded that the firm was not entitled to registration as the income was not accounted for by the firm.

2. Continuation of Registration for the Assessment Year 1974-75:
For the assessment year 1974-75, the assessee filed a declaration under section 184(7) of the I.T. Act for continuation of registration. The ITO found the declaration to be in order and granted continuation. The Commissioner, however, canceled this continuation on the same grounds as the initial registration, arguing that the firm's failure to account for the managing partner's individual income violated the partnership deed and thus invalidated the firm's registration.

3. Impact of a Partner Conducting Individual Business on the Firm's Registration:
The Tribunal disagreed with the Commissioner, stating that the firm was genuine and lawfully constituted. The Tribunal emphasized that even if clause 13 of the partnership deed was varied by mutual consent, allowing the managing partner to conduct individual business, it did not affect the firm's registration. The Tribunal noted that the Department did not claim the firm was not genuine or unlawfully constituted. The Tribunal held that the failure to account for the managing partner's individual income did not render the firm non-genuine or unlawfully constituted. The Tribunal cited the Supreme Court decision in CIT v. Sivakasi Match Exporting Co., which stated that the ITO's jurisdiction is confined to ascertaining whether the application for registration conforms to the rules and whether the firm is genuine or legally existent.

Conclusion:
The High Court upheld the Tribunal's decision, stating that the firm's registration could not be denied based on the managing partner's individual business activities. The Court clarified that the constitution of the firm, as specified in the partnership deed, was not affected by the managing partner's individual business. The Court emphasized that the firm remained genuine and lawfully constituted, satisfying the requirements for registration under section 184 and 185 of the I.T. Act. The High Court concluded that the Tribunal was correct in setting aside the Commissioner's order and affirmed that the assessee-firm was entitled to registration for 1973-74 and continuation for 1974-75. The question was answered in the negative, in favor of the assessee, and against the Revenue.