1990 (3) TMI 149 - AT - Income Tax

Summary

Issues Involved:

1. Refusal of registration of the assessee firm by the Income-tax Officer (ITO).
2. Allegation of non-genuine partners.
3. Distribution of profits not in accordance with the profit-sharing ratio in the partnership deed.
4. Treatment of additional income from unexplained cash credits.

Issue-wise Detailed Analysis:

1. Refusal of Registration of the Assessee Firm by the Income-tax Officer (ITO):

The appeal by the department contested the order dated 9-10-1986 by the Commissioner of Income-tax (Appeals) [CIT(A)], Nasik, which directed the ITO to grant registration to the assessee firm. Initially, the ITO refused registration citing two grounds: the non-genuineness of four lady partners and the improper distribution of profits according to the profit-sharing ratio mentioned in the partnership deed.

2. Allegation of Non-genuine Partners:

The CIT(A) held that based on the statements provided by the four lady partners, it could not be concluded that they were not genuine partners. Consequently, registration could not be refused on this ground. This position was upheld by the Tribunal, which directed the ITO to reconsider the matter and provide the assessee an opportunity to explain the additional income declared in the revised return.

3. Distribution of Profits Not in Accordance with the Profit-sharing Ratio in the Partnership Deed:

The ITO, in fresh proceedings, refused registration on the ground that the additional income from unexplained cash credits was not distributed among the partners in the profit-sharing ratio. The CIT(A) observed that the assessee firm had declared the additional income to buy peace with the department, and the amount was not the actual income of the assessee. The CIT(A) further noted that the additional income was never capitalized or credited to the partners' capital accounts, and thus, it did not constitute secret profits requiring distribution as per the partnership deed.

4. Treatment of Additional Income from Unexplained Cash Credits:

The CIT(A) distinguished the Supreme Court decision in Khanjan Lal Sewak Ram v. CIT, stating it was not applicable as the additional income in question did not represent actual profits but was offered to buy peace with the department. The CIT(A) relied on the decision in CIT v. Sat Ram Gian Chand, which held that divisible profits did not mean assessable or assessed profits. The Tribunal supported this view, stating that the profits to be divided among partners are those computed in the books by the assessee, not the assessed profits.

The Tribunal also referenced the Andhra Pradesh High Court decision in Variety Hall & Ramakrishna Textiles v. CIT, which supported the view that registration cannot be refused merely because additional income from undisclosed sources was not distributed among partners. The Tribunal distinguished the Supreme Court decision in Khanjan Lal Sewak Ram, emphasizing that it applied to cases where extra profits were earned outside the books and not distributed according to the partnership deed.

The Tribunal concluded that the ITO's refusal to grant registration based on the non-distribution of additional income was untenable. It affirmed the CIT(A)'s order directing the ITO to grant registration, noting that the genuineness of the firm was not in doubt and other conditions for registration were met.

Conclusion:

The appeal by the department was dismissed, and the order of the CIT(A) directing the ITO to grant registration to the assessee firm was confirmed. The Tribunal emphasized that the additional income declared by the assessee did not constitute profits requiring distribution as per the partnership deed, and the refusal of registration on this ground was not legally tenable.