1983 (3) TMI 77 - AT - Income Tax

Summary

Issues:
1. Interpretation of section 186(1) of the Income-tax Act, 1961 regarding cancellation of registration granted to a firm.
2. Validity of registration for assessment years 1976-77 and 1977-78 due to non-specification of profit-sharing ratio in the partnership deed.
3. Applicability of section 13 of the Partnership Act in determining the genuineness of a partnership firm.

Analysis:
The Appellate Tribunal ITAT Amritsar heard the appeal of an assessee-firm against the ITO's order under section 186(1) of the Income-tax Act, 1961 for the assessment years 1976-77 and 1977-78. The issue revolved around the cancellation of registration granted to the firm due to the absence of a profit-sharing ratio in the partnership deed. The ITO and the AAC contended that the deed of rectification submitted by the assessee was not genuine and that non-specification of profit-sharing ratio could disentitle the firm from registration under section 186(1). The assessee argued through its counsel that the absence of a profit-sharing ratio does not render a firm non-genuine and relied on legal precedents to support this claim.

The counsel for the assessee highlighted that under section 13(b) of the Partnership Act, in the absence of a specified profit-sharing ratio, the shares of partners are deemed equal. Referring to relevant case law and a Supreme Court ruling, the counsel argued that the partnership deed should be read as a whole to determine profit-sharing arrangements. The assessee maintained that profits were divided equally among partners and filed necessary forms for registration. The revenue contended that the lower authorities were correct in their decision, emphasizing the importance of specifying profit-sharing ratios in the partnership deed.

After considering the arguments, the Tribunal held that the absence of a profit-sharing ratio in the partnership deed does not make a firm non-genuine. Section 13 of the Partnership Act was invoked to establish that partners' shares are equal in the absence of a specific agreement. The Tribunal concluded that the ITO's action of cancelling registration for both assessment years was contrary to law. Citing the Allahabad High Court ruling, the Tribunal emphasized that registration can only be cancelled if the firm is found to be non-genuine. The Tribunal also agreed with the assessee's claim that non-specification of profit-sharing ratio does not affect the genuineness of the firm.

In light of the above analysis, the Tribunal allowed the appeals of the assessee, cancelled the ITO's orders under section 186(1) for the assessment years 1976-77 and 1977-78, and reinstated the original orders granting registration and continuation of registration for the said years. The judgment highlighted the importance of considering the overall circumstances of a case when determining the genuineness of a partnership firm, especially in situations where profit-sharing ratios are not explicitly specified in the partnership deed.