1977 (3) TMI 71 - AT - Income Tax

Summary

Issues Involved:
1. Validity of the CIT's invocation of jurisdiction under Section 263 of the IT Act, 1961.
2. Determination of the genuine partnership and the number of partners in the firm.
3. Legality of the ITO's order granting continuation of registration under Section 184(7) of the IT Act, 1961.

Detailed Analysis:

1. Validity of the CIT's Invocation of Jurisdiction under Section 263 of the IT Act, 1961:

The CIT invoked Section 263 of the IT Act, 1961, to set aside the ITO's orders granting renewal of registration for the assessment years 1971-72 and 1972-73, arguing that these orders were prejudicial to the interests of revenue. The CIT directed the ITO to provide an opportunity to the firm to file a fresh declaration in Form 12 and, if the declaration was in order, to grant renewal of registration. Otherwise, the ITO was to cancel the registration under Section 185(3). The assessee contended that the CIT's invocation of Section 263 was invalid as there was no error in the ITO's orders under Sections 143(3) and 184(7). The assessee argued that the CIT could not invoke Section 263 since there was no specific order under Section 184(7) to revise, and the registration granted for the assessment year 1970-71 would automatically continue for the subsequent years under appeal.

2. Determination of the Genuine Partnership and the Number of Partners in the Firm:

The CIT held that there was a genuine partnership of nine partners and that the ITO was incorrect in granting renewal of registration for a firm of only five partners. However, the assessee argued that the partnership deed dated 21st February 1969, clearly indicated that only five persons were the contracting partners. The CIT's assertion that the firm comprised nine partners was based on the inclusion of four retired partners who had entered into "working partnership agreements" with the firm. The Tribunal found that the retired partners had indeed left the firm and were merely employed by the firm for remuneration. The essential ingredients of a valid partnership, such as an agreement to carry on business, sharing of profits, and the principle of agency, were satisfied by the five partners named in the deed dated 21st February 1969. The Tribunal concluded that the assessee firm comprised only the five signatories to the partnership deed and was a genuine firm.

3. Legality of the ITO's Order Granting Continuation of Registration under Section 184(7) of the IT Act, 1961:

The ITO had granted continuation of registration for the assessment years 1971-72 and 1972-73 based on the application in Form No. 12. The CIT argued that the ITO's orders were erroneous and prejudicial to the interests of revenue. The Tribunal, however, noted that the conditions under Section 184(7) were satisfied, and the registration granted for the assessment year 1970-71 would have effect for the subsequent years under appeal. The Tribunal emphasized that the CIT's finding of a genuine firm contradicted his decision to cancel the registration. The Tribunal held that there was no error in the ITO's order granting continuation of registration and that the CIT's orders were invalid.

Conclusion:

The Tribunal concluded that the assessee firm was a genuine partnership of five partners as per the deed dated 21st February 1969. The CIT's orders invoking Section 263 were found to be invalid, and the ITO's orders granting continuation of registration for the assessment years 1971-72 and 1972-73 were restored. The appeals filed by the assessee were allowed.