1980 (8) TMI 80 - HC - Income Tax

Summary

Issues Involved:
1. Authority of the Income-tax Officer (ITO) to condone the delay in filing a declaration under section 184(7) read with section 185(2) of the Income-tax Act, 1961.
2. Necessity for all partners to agree to bring about a change in the constitution of the firm within the meaning of section 187 of the Income-tax Act, 1961.
3. Entitlement of the firm to continuation of registration under section 184(7) of the Income-tax Act, 1961.

Detailed Analysis:

1. Authority of the ITO to Condone Delay:
The Tribunal held that the ITO had the authority to condone the delay in the filing of the declaration under section 184(7) read with section 185(2) of the Income-tax Act, 1961. The ITO initially rejected the application for registration due to the wrong form being used, but the defect was rectified within a fortnight. The Appellate Assistant Commissioner (AAC) supported this rectification, stating that the ITO had to inform the assessee of the defect and provide a one-month period to rectify it, which was complied with by the assessee.

2. Necessity for All Partners to Agree on Change in Constitution:
The Tribunal concluded that a change in the constitution of the firm could only be brought about by the volition of all partners and could not be made unilaterally by some partners to the exclusion of others. The existence of secret profits made by some partners did not constitute a change in the constitution of the firm or the profit-sharing ratio unless there was mutual agreement among all partners. This conclusion was based on the fact that secret profits were shared without the knowledge or consent of all partners, which did not amount to an agreed change in the firm's constitution.

3. Entitlement to Continuation of Registration:
The Tribunal found that the firm was entitled to continuation of registration under section 184(7) of the Income-tax Act, 1961. This was based on the fact that the declaration furnished by the firm was correct and there was no change in the constitution or the profit-sharing ratio of the partners as per the partnership deed. The ITO's assessment included the secret profits and divided them equally among the partners, indicating that the profit-sharing ratio remained unchanged.

The legal position under the Income-tax Act, 1961, differs significantly from the earlier Act of 1922. Under the 1961 Act, once a firm is registered, the registration is effective for subsequent years provided there is no change in the constitution or the shares of the partners, and a declaration to that effect is furnished. The ITO is to record a certificate of registration for subsequent years if these conditions are met. However, if facts come to light suggesting the declaration is incorrect, the ITO may refuse to record the certificate.

In this case, the Tribunal found that the secret profits made by some partners did not alter the partnership deed or the legal rights of the partners. The dishonest actions of some partners did not constitute a change in the constitution of the firm. Consequently, the conditions of section 184(7) were satisfied, and the firm was entitled to continuation of registration.

Conclusion:
The Tribunal's conclusions were upheld, and the questions referred were answered in the affirmative in favor of the assessee and against the department. The firm was entitled to continuation of registration under section 184(7) despite the secret profits made by some partners, as there was no mutual agreement to change the constitution or profit-sharing ratio of the firm.