1985 (8) TMI 107 - AT - Income Tax

Summary

Issues Involved:
1. Validity of the assessment period.
2. Change in the constitution of the firm.
3. Entitlement to registration of the firm.
4. Production and verification of books of account.

Issue-wise Detailed Analysis:

1. Validity of the Assessment Period:
The primary issue was whether the assessment should be framed as a single unit for the entire period from 1st April 1977 to 31st March 1978, or if separate assessments should be made for the periods 1st April 1977 to 2nd Sept 1977 and 24th Oct 1977 to 31st March 1978. The AAC initially framed one assessment for the entire period. However, it was argued that the firm was dissolved on 2nd Sept 1977, and a new partnership commenced on 24th Oct 1977. The Tribunal concluded that there were three distinct periods: 1st April 1977 to 2nd Sept 1977, 3rd Sept 1977 to 23rd Oct 1977, and 24th Oct 1977 to 31st March 1978. The period from 3rd Sept 1977 to 23rd Oct 1977 was treated as the proprietary business of Shri Lachhman Dass Jain.

2. Change in the Constitution of the Firm:
The Tribunal examined whether there was a change in the constitution of the firm or a dissolution. It was determined that the firm constituted by the deed of partnership dated 5th March 1965 was dissolved on 2nd Sept 1977 when the license for exhibiting films was transferred to Shri Lachhman Dass Jain. The Tribunal held that there was an interregnum between 3rd Sept 1977 and 23rd Oct 1977, during which no valid partnership could exist without the District Magistrate's permission.

3. Entitlement to Registration of the Firm:
The Tribunal addressed whether the firm was entitled to registration for the periods in question. For the first period (1st April 1977 to 2nd Sept 1977), the Tribunal found that a declaration in Form No. 12 seeking the benefit of continuance of registration was duly filed, and thus, the benefit of continuance of registration should have been allowed. For the second period (24th Oct 1977 to 31st March 1978), the Tribunal concluded that a new partnership was constituted by the deed dated 3rd Nov 1977, and all formalities for registration were completed within the time allowed. Therefore, the firm was entitled to registration for this period under Section 185(1)(a) of the IT Act.

4. Production and Verification of Books of Account:
The Tribunal examined whether the books of account were produced and verified. The AAC had verified that the books of account for the first and third periods were produced before the ITO and that the profits were divided among the partners as per the partnership deed dated 3rd Nov 1977. The Tribunal found no merit in the IAC's direction that the return for the first period was invalid because it was signed by Shri Lachhman Dass Jain, who was not competent to do so. The Tribunal concluded that the firm was genuine, and the profits were distributed as specified in the partnership deed.

Conclusion:
The Tribunal dismissed the appeal by the Revenue and allowed the appeal by the assessee. It confirmed the order of the AAC granting registration to the firm but rejected the clubbing of income for all three periods. The Tribunal recognized the three distinct periods for assessment and upheld the registration for the periods 1st April 1977 to 2nd Sept 1977 and 24th Oct 1977 to 31st March 1978. The period from 3rd Sept 1977 to 23rd Oct 1977 was treated as the proprietary business of Shri Lachhman Dass Jain.