1998 (8) TMI 112 - AT - Income Tax

Summary

Issues Involved:
1. Validity of the Assessing Officer's rejection of the assessee-firm's registration.
2. Impact of prior individual assessments of partners on the firm's registration.
3. Applicability of legal precedents and case laws cited by both parties.

Detailed Analysis:

1. Validity of the Assessing Officer's Rejection:
The Assessing Officer (AO) rejected the registration of the assessee-firm based on the induction of two new partners, Shri A. K. Puri and Shri Vivek Puri, who were found not to have contributed capital or rendered services to the firm. The AO concluded that these admissions were merely to adjust family shares and did not constitute a genuine partnership. The AO relied on various case laws, including Shazada Nand & Sons v. CIT, Ramdas Ramlal v. CIT, Brijlal Madanlal v. CIT, and S. P. Gramophone Co. v. CIT, which emphasized that mere entry of names in a partnership deed does not automatically validate a genuine partnership.

2. Impact of Prior Individual Assessments of Partners:
The assessee argued that the AO was legally bound to allow registration since individual assessments of the partners had already been completed, assessing their shares of profit from the firm as profits of a registered firm. The assessee relied on the Supreme Court's decision in CIT v. Murlidhar Jhawar & Puma Ginning & Pressing Factory, which stated that once partners are assessed on their respective shares, subsequent assessment in the status of an unregistered firm is not warranted. The CIT(A) supported this view, directing the AO to grant registration based on completed partner assessments and the CBDT Circular dated 24-8-1966.

3. Applicability of Legal Precedents and Case Laws:
The CIT(A) based its decision on the Supreme Court's ruling in Murlidhar Jhawar & Puma Ginning & Pressing Factory and the Gujarat High Court's decision in Laxmichand Hirjibhai v. CIT. However, the Tribunal noted that the Supreme Court, in ITO v. Ch. Atchaiah, had reversed the Andhra Pradesh High Court's decision, which was based on the same precedent. The Supreme Court clarified that under the Income-tax Act, 1961, the AO must tax the "right person" and does not have the option to tax either the firm or its partners individually, as was the case under the 1922 Act. This distinction invalidated the CIT(A)'s reliance on the earlier Supreme Court and High Court decisions.

Conclusion:
The Tribunal concluded that the CIT(A)'s order was not sustainable in law due to the Supreme Court's clarification in ITO v. Ch. Atchaiah. The file was restored to the CIT(A) to decide the merits of the assessee-firm's registration claim and whether a genuine firm existed, as initially determined by the AO. The appeal was allowed for statistical purposes.