1981 (3) TMI 28 - HC - Income Tax

Summary

Issues Involved:
1. Retirement of a partner and change in the constitution of the firm.
2. Proper ascertainment and allocation of profits.
3. Compliance with the procedural requirements for registration under Section 184 and 185 of the I.T. Act, 1961.
4. Entitlement to registration despite improper adjustments in the books of account.

Issue-wise Detailed Analysis:

1. Retirement of a Partner and Change in the Constitution of the Firm:
The primary issue revolved around the retirement of Sri Srinarain Daga and its effect on the constitution of the firm. The assessee claimed that Sri Srinarain Daga retired on March 30, 1968, as per a notice dated February 5, 1968. However, the Income Tax Officer (ITO) did not accept this claim and held that all four partners retired on August 4, 1968. Consequently, a fresh partnership deed was executed on August 5, 1968, between the remaining two partners. The Tribunal upheld the ITO's view, leading to the question of whether the assessee's claim for registration was rightly refused.

2. Proper Ascertainment and Allocation of Profits:
The ITO found that profits for the period up to August 4, 1968, were not allocated between the partners according to their shares as per the deed dated April 23, 1966. The assessee contended that the profits were divided proportionately based on the periods of different constitutions of the firm. However, the AAC and the Tribunal held that the profits were not correctly ascertained and allocated, leading to the refusal of registration.

3. Compliance with Procedural Requirements for Registration:
The assessee filed Form No. 12 on December 30, 1969, and Form No. 11A on August 12, 1968. The relevant provisions of Section 184 and 185 of the I.T. Act, 1961, and Rules 22 to 25 of the I.T. Rules, 1962, were examined. Section 184(7) and (8) deal with the registration of firms and the requirement for fresh registration in case of a change in the constitution of the firm. The court noted that the assessee complied with the procedural requirements by filing Form No. 11A before the end of the previous year.

4. Entitlement to Registration Despite Improper Adjustments in the Books of Account:
The court considered whether the assessee was entitled to registration despite the improper adjustments in the books of account. The court referred to various judicial precedents, including decisions from the Punjab and Haryana High Court, Kerala High Court, and Supreme Court, which emphasized that procedural defects should not disentitle an assessee from registration if the substantive requirements were met. The court concluded that the firm was entitled to registration, provided the accounts were adjusted to reflect the new partnership deed dated August 5, 1968.

Conclusion:
The court answered the question in the negative, holding that the Tribunal was not justified in refusing the assessee's claim for registration. The assessee was directed to adjust the accounts considering the new partnership deed dated August 5, 1968. The Tribunal was instructed to provide the necessary opportunities for this adjustment. The parties were ordered to bear their own costs.