1971 (1) TMI 41 - HC - Income Tax

Whether Tribunal was right in holding that the registration granted to the assessee-firm would have effect for the assessment year 1963-64 under section 184(7) notwithstanding that there had been no ascertainment or division of the profits of the business among the partners of the firm - question is, answered in the affirmative and in favour of the assessee

Summary

Issues Involved:
1. Whether the Appellate Tribunal was correct in holding that the registration granted to the assessee-firm would have effect for the assessment year 1963-64 under section 184(7) of the Income-tax Act, 1961, notwithstanding the absence of ascertainment or division of the profits among the partners.

Detailed Analysis:

Issue 1: Scope and Application of Sections 184, 185, and 186 of the Income-tax Act, 1961
The case revolves around the interpretation of sections 184, 185, and 186 of the Income-tax Act, 1961, and the corresponding rules and forms. Section 184 provides for the granting of registration to firms, requiring an application in Form No. 11 for the original registration. For renewal of registration, Form No. 12 is used, provided there is no change in the constitution of the firm or the shares of the partners. The Income-tax Officer must ascertain the correctness of the declaration made in Form No. 12 and can refuse registration if the firm is not genuine or if there is a change in its constitution or the shares of its partners.

Issue 2: Interpretation of "Change in Constitution" and "Distribution of Profits"
The court clarified that a "change in the constitution" of a firm refers to changes in the partners or their shares as specified in the deed of partnership. The absence of ascertainment or distribution of profits does not constitute a change in the constitution or the shares of the partners. The court emphasized that the provisions of section 184(7) do not list the failure to ascertain or distribute profits as a condition for refusing continuation of registration.

Issue 3: Judicial Discretion and Statutory Duty of Income-tax Officer
The court held that the discretion vested in the income-tax authorities under sections 184 and 185 is judicial and must be exercised based on the conformity of the application with the rules and the genuineness of the firm. The Income-tax Officer can reject the application only if the firm is not genuine or if the declarations made are false. The officer is also empowered to cancel the registration under section 186 if the firm is found not to be genuine after granting registration.

Issue 4: Practical Implications and Legal Precedents
The court noted that the registration of a firm under the Act confers benefits such as lower rates of assessment. The court referred to the case of Commissioner of Income-tax v. Abdul Rahim & Co., stating that a firm is entitled to registration even if one of the partners is a benami. The court also dismissed the standing counsel's argument that the Income-tax Officer would be compelled to grant registration in each case and then cancel it under section 186 if the firm is not genuine.

Issue 5: Specific Facts of the Case
In the present case, the Income-tax Officer had found the declaration made by the assessee-firm to be true, with no change in the constitution or the shares of the partners. The refusal of registration was solely based on the absence of ascertainment or distribution of profits, which the court found to be an invalid ground. The court also noted that the assessee had filed a statement showing the distribution of profits, which the Income-tax Officer could use to assess the income of the partners.

Conclusion:
The court concluded that the assessee-firm was entitled to the continuation of registration for the assessment year 1963-64. The question referred to the court was answered in the affirmative and in favor of the assessee. The court awarded costs to the assessee and fixed the advocate's fee at Rs. 250.