1979 (9) TMI 20 - HC - Income Tax

Issues Involved:
1. Existence of the partnership firm during the relevant period.
2. Validity of profit distribution among partners.
3. Eligibility for registration under Section 184 of the Income-tax Act, 1961.

Detailed Analysis:

1. Existence of the Partnership Firm During the Relevant Period:

The primary issue was whether the partnership firm existed from April 1, 1971, to February 21, 1972. The Income-tax Officer (ITO) and the Appellate Assistant Commissioner (AAC) rejected the firm's registration application, asserting that the firm did not exist during this period. They contended that the firm only came into being on February 22, 1972, when Firdoos Ahmad Bhat was inducted as a new partner.

The Tribunal, however, disagreed, stating that the firm was governed by two different partnership deeds during the relevant year: the deed dated March 25, 1970, and the deed dated March 27, 1972. They concluded that the firm was indeed in existence throughout the year, governed by the respective deeds.

The court clarified that the induction of a new partner constituted a reconstitution, not a dissolution, of the firm. Citing Tyresoles (India), Calcutta v. CIT [1963] 49 ITR 515 (Mad), the court emphasized that reconstitution implies a structural alteration without ending the firm's existence. The partnership deed dated March 27, 1972, was supplemental to the deed dated March 25, 1970, indicating continuity rather than a fresh start.

2. Validity of Profit Distribution Among Partners:

The second issue revolved around the distribution of profits for the entire year, including the period before the new partner joined. The ITO and AAC argued that Firdoos Ahmad Bhat could not be allocated profits for the entire year as he joined only on February 22, 1972.

The Tribunal acknowledged the error in profit distribution but asserted that this mistake alone was insufficient to deny registration. The court supported this view, stating that once a firm is found genuine and in existence during the relevant year, registration cannot be refused merely due to non-compliance with profit distribution terms.

Referencing R. C. Mitter & Sons v. CIT [1959] 36 ITR 194 (SC), the court noted that the Supreme Court's decision was based on pre-1961 rules, which were materially different from the current provisions under Section 185 of the Income-tax Act, 1961.

3. Eligibility for Registration Under Section 184 of the Income-tax Act, 1961:

The Tribunal directed the ITO to allow the firm's registration for the assessment year 1972-73. The court examined Section 185, which mandates the ITO to inquire into the firm's genuineness and constitution as specified in the partnership instrument. If satisfied, the ITO must register the firm; otherwise, he must refuse registration.

The court concluded that the partnership deed dated March 25, 1970, along with the modifications in the deed dated March 27, 1972, met the legal requirements for registration. The deeds evidenced a genuine firm in existence during the relevant year, satisfying Section 185's criteria.

The court also referenced Waddington v. O'Callaghan [1931] 16 TC 187, 197 (KB), explaining that retrospective clauses in partnership deeds relate to accounting purposes rather than altering the actual date of partnership formation.

Conclusion:

The court affirmed the Tribunal's decision, holding that the firm was eligible for registration for the assessment year 1972-73. The question referred to the court was answered in the affirmative, in favor of the assessee and against the department. No order as to costs was made, and counsel's fee was assessed at Rs. 150.

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