1966 (4) TMI 5 - HC - Income Tax

Change In Constitution Of Firm - there was no change in the firm and the partnership was in existence when it was registered and was not a bogus or not a genuine one, and its constitution was not void, registration could not be refused - firm was entitled to renewal of registration u/s 26A

Issues Involved:
1. Entitlement to renewal of registration under section 26A of the Indian Income-tax Act, 1922.
2. Appropriation of profits in accordance with the instrument of partnership.
3. Interpretation of "constitution of a firm" under the Indian Income-tax Act, 1922.

Issue-Wise Detailed Analysis:

1. Entitlement to Renewal of Registration under Section 26A of the Indian Income-tax Act, 1922:
The primary issue was whether the assessee-firm was entitled to renewal of registration for the assessment years 1960-61 and 1961-62. The Income-tax Officer refused renewal on the ground that the appropriation of profits was not in accordance with the instrument of partnership. The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal upheld this decision. The Tribunal concluded that the payment of salaries to two partners, not authorized by the partnership deed, constituted a change in the constitution of the firm, thus justifying the refusal of renewal.

2. Appropriation of Profits in Accordance with the Instrument of Partnership:
The assessee-firm's application for renewal stated that two partners were paid salaries during the relevant period, although the partnership deed did not explicitly provide for such payments. The Tribunal found that there was no majority decision by the partners authorizing these payments, thus violating the partnership deed. The Tribunal emphasized that the profits should be divided as mentioned in the deed, and any deviation, such as unauthorized salary payments, warranted refusal of renewal.

3. Interpretation of "Constitution of a Firm" under the Indian Income-tax Act, 1922:
The court examined whether the payment of salaries to partners, without provision in the partnership deed, altered the constitution of the firm. The court referred to the plain meaning of "constitution of a firm," which generally refers to the composition or structure of the firm, primarily determined by its partners. The court noted that a change in the constitution typically involves the inclusion of a new partner or the exit of an existing one, rather than a change in profit-sharing proportions among unchanged partners.

The court cited the High Court of Calcutta's decision in In re Moolji Sicka, which supported the view that a change in profit-sharing proportions does not constitute a change in the constitution of a firm. The court concluded that the payment of salaries to partners, even if unauthorized, did not alter the constitution of the firm. The court emphasized that section 13 of the Indian Partnership Act allows for remuneration to partners if there is a consensual contract, and unauthorized payments do not necessarily change profit-sharing proportions.

The court further referenced the Supreme Court's elucidation in Commissioner of Income-tax v. Sivakasi Match Exporting Co., which clarified that the Income-tax Officer's jurisdiction in registration matters is limited to verifying the conformity of the application with the rules and the existence and genuineness of the firm. The court found that the Tribunal did not doubt the firm's existence, genuineness, or legal constitution.

Conclusion:
The court concluded that there was no change in the constitution of the firm during the relevant periods and that the payment of salaries to partners did not result in a change in profit-sharing proportions. Therefore, the assessee-firm was entitled to renewal of registration under section 26A of the Indian Income-tax Act, 1922, for the assessment years 1960-61 and 1961-62. The question was answered in favor of the assessee, and the assessee was entitled to its costs, with an advocate's fee of Rupees two hundred and fifty (Rs. 250).

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