1980 (1) TMI 58 - HC - Income Tax

Summary

Issues Involved:
1. Whether the Tribunal was correct in holding that the loss of the assessee-firm for the assessment year 1971-72 was divided amongst the partners in accordance with the partnership deed.
2. Whether the Tribunal was correct in directing the grant of registration to the assessee-firm for the assessment year 1971-72.

Issue-Wise Detailed Analysis:

1. Division of Loss Amongst Partners:
The Tribunal held that the loss of the assessee-firm for the assessment year 1971-72 was divided amongst the partners in accordance with the partnership deed. The facts established that the accounts were closed on March 31, 1971, with a loss of Rs. 1,39,096, and the previous year's loss of Rs. 44,653 was also not allocated amongst the partners initially. However, before the completion of the assessment on March 29, 1974, the assessee filed a revised balance-sheet showing the allocation of the total loss of Rs. 1,54,749. This allocation was shown on the assets side and was not debited to the individual accounts of the partners. The Tribunal opined that the allocation of loss before the completion of assessment was sufficient and that no particular mode of allocation is prescribed in the Act. The Tribunal concluded that the fact that the loss had not been debited to the partners' individual accounts did not make any difference.

2. Grant of Registration to the Assessee-Firm:
The Tribunal directed the grant of registration to the assessee-firm for the assessment year 1971-72. The Tribunal referred to the certificate contained in the application for registration in Form No. 11, which stated that the loss of the previous year "will be divided." The Tribunal found that the allocation of loss before the completion of assessment was sufficient for the purpose. The conditions essential to the registration of a firm under Section 184 of the I.T. Act, 1961, were fulfilled, including the application being made in the prescribed form, the partnership being evidenced by an instrument, and the individual shares of the partners being specified in that instrument. The Tribunal held that the genuineness of the partnership was not disputed, and the firm was constituted as shown in the instrument of partnership. The Tribunal concluded that merely because the loss was allocated subsequent to the making of the application but before the completion of the assessment, the firm could not be refused registration.

Legal Precedents and Context:
The judgment referenced several legal precedents and the relevant provisions of the Partnership Act and the I.T. Act. It was noted that in Variety Hall and Ramakrishna Textiles v. CIT, the Andhra Pradesh High Court held that the failure to divide a portion of the profits amongst the partners in accordance with the terms of the partnership deed did not by itself disentitle the firm to be registered, as long as the partnership was genuine and constituted as shown in the instrument of partnership. The court distinguished the present case from other cases cited by the department, such as Sher-e-Punjab Silk Stores v. CIT, Khanjan Lal Sewak Ram v. CIT, and Ganesh Lal Laxmi Narain v. CIT, where the facts were different, and the applications for renewal of registration did not comply with the conditions prescribed.

Conclusion:
The court concluded that if it is stated in the application for registration that the profit/loss would be divided amongst the partners and if before the completion of the assessment such division is actually made, registration cannot be refused if the other requirements are duly satisfied. The court held that the mode of distribution of profit/loss is not prescribed in the Act or the rules, and if it is made in a manner indicating that the division has been made in accordance with the shares specified in the partnership deed, no fault can be found with such division. Therefore, the court agreed with the Tribunal's view and answered the questions in the affirmative, against the department and in favor of the assessee.