1978 (9) TMI 17 - HC - Income Tax

Partnership Deed Powers Of Commissioner Registered Firm Registration Of Firm Unregistered Firm

Summary

Issues Involved:
1. Justification of cancellation of registration of the firm.
2. Change of assessment status of the firm after the partners had been assessed.
3. Scope of the Commissioner's power to cancel registration under section 186 of the Income-tax Act.

Detailed Analysis:

1. Justification of Cancellation of Registration:
The primary issue was whether the cancellation of the firm's registration was legally justified. The firm was initially registered under an instrument of partnership specifying unequal shares among the partners. However, the profits were divided equally, contrary to the partnership deed. This discrepancy led the Commissioner to invoke section 263 of the Income-tax Act, finding the ITO's order erroneous. The court emphasized that for a firm to obtain registration under section 185, it must meet specific conditions, including the actual constitution as specified in the instrument. The court held that the firm was not genuine as registered due to the variance in the profit-sharing ratio. This view was supported by precedents such as Khanjan Lal Sewak Ram v. CIT and Krishna Gopal and Brothers v. CIT, where non-compliance with specified shares led to cancellation of registration. The court concluded that the firm's registration was rightly canceled as it did not distribute profits according to the partnership deed.

2. Change of Assessment Status After Partners' Assessment:
The second issue addressed whether the firm's assessment status could be changed to an unregistered firm after the partners had been assessed. The court clarified that the ITO cannot assess the same income twice. However, in this case, the Commissioner, exercising revisional powers, found the initial registration erroneous and set it aside. Consequently, the firm had to be assessed as an unregistered firm. The court referred to sub-sections (3) and (4) of section 186, which mandate amending the assessments of both the firm and its partners upon cancellation of registration. The court held that this legal consequence did not equate to a voluntary election by the ITO or Commissioner and was a statutory duty. Thus, the assessment status change was valid and necessary.

3. Scope of Commissioner's Power to Cancel Registration:
The third issue was whether the Commissioner could cancel the firm's registration only under section 186. The court noted that section 263(1) allows the Commissioner to pass suitable orders if the ITO's order is erroneous and prejudicial to the revenue's interests. The Commissioner found that the ITO erred in granting registration, justifying his interference. The court emphasized that the Commissioner's powers were co-extensive with the ITO's under section 186, meaning he could act if the ITO had committed an error. The Tribunal's view that the Commissioner could not direct amendments to the partners' assessments was rejected. The court held that under section 263, the Commissioner could indicate the need for amending both the firm's and partners' assessments, aligning with section 186(3).

Conclusion:
The court answered all three questions in the affirmative, supporting the department's actions and against the assessee. The Commissioner was justified in canceling the firm's registration due to the improper profit distribution, the firm's assessment status could be changed post-partners' assessment, and the Commissioner's power to cancel registration was confined to section 186. The department was awarded costs assessed at Rs. 200.