1987 (2) TMI 122 - AT - Income Tax

Summary

Issues Involved:
1. Validity of continuation of registration of the assessee firm.
2. Distribution of profits according to the partnership deed.
3. Genuineness of the firm.

Detailed Analysis:

1. Validity of Continuation of Registration:

The primary issue in this appeal is whether the continuation of registration of the assessee firm, originally granted under section 185(1)(a) for the assessment year 1980-81, should be upheld for the assessment year 1981-82. The assessee firm, consisting of 18 partners, sought continuation of registration by filing Form No. 12 on 27-6-1981. The Income-tax Officer (ITO) refused this continuation due to findings from a search and seizure operation on 12-9-1983, which revealed undisclosed income and secret profits not apportioned according to the partnership deed. The Commissioner of Income-tax (Appeals) [CIT(A)] directed the ITO to grant continuation of registration, leading to the present departmental appeal.

2. Distribution of Profits According to the Partnership Deed:

The department argued that the secret profits were not distributed as per the profit-sharing ratio specified in the partnership deed, rendering the firm ineligible for continuation of registration. The assessee countered by citing the Andhra Pradesh High Court decision in CIT v. Voleti Veerabhadra Rao & Sons [1972] 84 ITR 764, which held that section 184(7) does not require the ascertainment or disbursement of profits among partners as a condition for continuation of registration. The CIT(A) found this argument compelling and directed the continuation of registration.

3. Genuineness of the Firm:

The department raised concerns about the genuineness of the firm, relying on the Andhra Pradesh High Court decision in CIT v. Badjanapara Salt Co. 1974 Tax. LR 19, which distinguished between a genuine firm and a valid firm in law. The department also cited the Supreme Court decision in Khanjan Lal Sewak Ram v. CIT [1972] 83 ITR 175, where the firm's application for renewal of registration was denied due to undistributed black market profits. However, the assessee argued that the provisions under the Income-tax Act, 1961, particularly section 184(7), and the forms prescribed under the 1962 Rules, differ from those under the Indian Income-tax Act, 1922. The CIT(A) and the Tribunal found that the firm's profits were distributed according to the partnership deed, and the firm's genuineness was not contested at earlier stages.

Conclusion:

The Tribunal upheld the CIT(A)'s decision to grant continuation of registration, emphasizing that the distribution of profits according to the partnership deed is not a prerequisite for continuation under section 184(7). The Tribunal also noted that any issues regarding the genuineness of the firm could be addressed under section 186, which allows for the cancellation of registration if the firm is found to be non-genuine. The appeal by the department was dismissed, confirming the validity of the continuation of registration for the assessee firm.