1981 (9) TMI 166 - AT - Income Tax

Summary

Issues:
1. Validity of the order of the CIT under section 263 of the IT Act, 1961.
2. Compliance with the terms of the partnership deed regarding payment of salary to partners.
3. Interpretation of circular of the CBDT regarding profit sharing ratio and registration of the firm.
4. Consideration of relevant legal precedents by the Commissioner.
5. Application of the judgment of the Hon'ble Punjab & Haryana High Court in a similar case.
6. Decision on the appeal against the order of the CIT.

Analysis:
1. The appeal was against the order of the CIT, Haryana, under section 263 of the IT Act, 1961, relating to the assessment year 1977-78. The CIT issued a notice to cancel the registration granted to the assessee due to the payment of salary to a partner in contravention of the partnership deed.

2. The CIT's notice was based on the ground that the payment of salary to a partner violated the terms of the partnership deed. The assessee argued that the firm was genuine, and the registration was rightly allowed by the ITO. The Commissioner relied on legal precedents, including the Supreme Court decision in A.C. Mittar & Sons vs. CIT and the judgment of the Calcutta High Court in CIT vs. Hassan ally & Sons.

3. The ITAT found no justification for the CIT's action, noting that there was a change in the firm's constitution due to the death of a partner, which was duly recorded in the partnership deed. The ITAT disagreed with the narrow interpretation of the circular of the CBDT by the Commissioner and emphasized that the circular did not disentitle a firm from registration if it was genuine, even if there were alterations in profit sharing ratios.

4. The ITAT highlighted that the Commissioner overlooked the judgment of the Hon'ble Punjab & Haryana High Court in a similar case, which emphasized that the division of profits did not affect the registration of a firm if the partnership was genuine and evidenced by an instrument. The ITAT set aside the Commissioner's order and restored the status quo ante.

5. Ultimately, the ITAT allowed the appeal, indicating that the firm had complied with the law, the registration was valid, and the Commissioner erred in canceling the ITO's order. The ITAT's decision was based on the genuineness of the partnership and adherence to legal requirements for registration.

This comprehensive analysis of the judgment outlines the issues involved, the arguments presented, the legal interpretations made, and the final decision rendered by the ITAT in favor of the assessee.