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Issues Involved:
1. Quantum appeal regarding the assessment of income. 2. Refusal of registration to the appellant firm under Section 185(1)(b) read with Section 185(5) of the Income Tax Act, 1961. Detailed Analysis: 1. Quantum Appeal: The appellant filed its return of income for the assessment year 1974-75, declaring an income of Rs. 29,300. The Income Tax Officer (ITO) completed the assessment ex parte under Section 144 of the Income Tax Act, 1961, determining the total income at Rs. 42,030 and refusing registration to the appellant firm. The Appellate Assistant Commissioner (AAC) deleted an addition of Rs. 11,930, reducing the total income assessed to Rs. 30,098 but confirmed the refusal of registration. The appellant's counsel conceded that no petition was filed under Section 146 of the Act and, given the minimal difference between the returned and assessed incomes, no further relief was due. Consequently, the quantum appeal was dismissed. 2. Refusal of Registration: The appellant contended that the refusal of registration was unjustified as the firm was genuine and had complied with all legal formalities. The appellant argued that the charging of interest on capital accounts was not in contravention of the partnership deed and that the minors were admitted only to the benefits of the partnership. The Revenue argued that the firm did not operate in accordance with the partnership deed and that the minors were made full-fledged partners. Additionally, the partnership deed was not attested by two witnesses, rendering it legally invalid. Analysis of Partnership Deed: The partnership deed dated 15th March 1973 indicated that the firm consisted of two adults and two minors admitted to the benefits of the partnership. Clause 3 stipulated the capital contributions and interest on additional capital, while Clause 4 outlined the profit-sharing ratios. The Tribunal found no evidence that the entire capital was subject to interest and rejected the appellant's contentions regarding mutual agreements for charging interest. However, it accepted that the amount credited to the first partner's account was salary, not capital, and thus did not warrant an adverse inference. Circular of the Central Board of Direct Taxes: The Tribunal found that the case was covered by the Circular in F. No. 26365-I.T.A. 1(AL) dated 20th May 1967, which recognized that variations in terms like interest and salary did not affect the genuineness or legality of the firm. The Circular was binding on the Departmental authorities, and the refusal of registration was deemed unjustified. Minors' Status and Legal Validity of Deed: The Tribunal rejected the Revenue's contention that the minors were full-fledged partners, noting that they were admitted only to the benefits of the partnership, as evidenced by the deed and the guardian's signature. The argument regarding the lack of attestation by two witnesses was also dismissed, as there was no legal requirement for such attestation for the partnership deed's validity. Exercise of Discretion under Section 185(5): The Tribunal observed that the ITO's discretion under Section 185(5) should be exercised judicially. The appellant had complied with the ITO's requisitions post the initial non-appearance, which did not justify the best judgment assessment under Section 144. However, since no petition under Section 146 was filed, the Tribunal focused on the improper exercise of discretion by the ITO, deeming it arbitrary and unjust. The decision of the Allahabad High Court in CIT vs. Raj Narain Tewari supported the appellant's contentions. Conclusion: The Tribunal reversed the orders of the authorities below, directed the ITO to grant registration to the appellant firm for the assessment year 1974-75, and modified the best judgment assessment under Section 144 accordingly. The registration appeal was allowed, and the quantum appeal was dismissed.
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