1979 (2) TMI 23 - HC - Income Tax

Summary

Issues Involved:
1. Whether the assessment of the unregistered firm was proper and legal.
2. Whether the firm should have been granted registration under Section 185 of the Income-tax Act.
3. Whether the income of the firm could be assessed in the hands of the firm after provisional or protective assessments were made in respect of some partners.

Issue-wise Detailed Analysis:

1. Whether the assessment of the unregistered firm was proper and legal:
The court examined the facts and circumstances under which the Income-tax Officer (ITO) refused registration to the firm and assessed it as an unregistered firm. The ITO found that the profits were not divided according to the partnership deed, and the minors were treated as "dummies." Consequently, the firm was assessed as an association of persons. The Tribunal upheld this decision, noting that the assessments of some partners were provisional or protective, and thus, the firm could be assessed separately without violating the principle of double taxation.

2. Whether the firm should have been granted registration under Section 185 of the Income-tax Act:
The court observed that the firm's application for registration was refused because the profits were not divided as per the partnership deed, and the minors were not actual partners. The ITO, the Appellate Assistant Commissioner (AAC), and the Tribunal all found sufficient grounds to refuse registration. The court noted that the refusal of registration was justified based on the evidence of duplicate sets of accounts showing the true distribution of profits and the actual contributors to the capital.

3. Whether the income of the firm could be assessed in the hands of the firm after provisional or protective assessments were made in respect of some partners:
The court referred to Sections 182 and 183 of the Income-tax Act, 1961, to clarify the assessment procedures for registered and unregistered firms. It emphasized that the ITO has the discretion to assess the firm and its partners to safeguard revenue interests. The court held that the ITO must determine the total tax payable by the firm and its real partners before exercising the option under Section 183. The court also distinguished the present case from earlier cases, noting that the real income of the firm was not subjected to tax in the hands of the partners who returned false and low incomes. Therefore, the assessment of the firm was valid despite the provisional or protective assessments of some partners.

Conclusion:
The court concluded that the assessment of M/s. Deccan Bharat Khandsari Sugar Factory, Hyderabad, as an unregistered firm was proper and legal. The refusal of registration was justified, and the ITO was correct in assessing the firm and its partners separately to ensure the real income was taxed appropriately. The reference was answered in the affirmative, and the decision was against the assessee. No costs were awarded, and the advocate's fee was fixed at Rs. 500.