2018 (7) TMI 487 - HC - Income Tax

Entitlement to grant of registration and to be assessed as a registered firm - change in the share of the partners in as much as the provision for salary and interest was made for the partners as required in terms of Section 40(b) - Held that - Payment of salary and / or interest paid to a partner on account of the work he does or further amount contributed for running of the firm. It does not change the share of profits as indicated in the partnership deed. The execution of an instrument laying down the salary to be paid to the partner and / or interest to be paid to the partners for the amount contributed by them had become necessary only for the purposes of claiming benefit of Section 40(b) of the Act. It has no relevance to decide whether or not there has been a change in the constitution of the firm or share in the partners for the purposes of being assessed as a partnership firm. As the appellant firm was already assessed as a partnership firm for the earlier assessment i.e. for Assessment Year 1992-93, by virtue of subsection 3 of Section 184 of the Act, the appellant firm would continue to be assessed as a partnership firm. This is so as there is no change either in the constitution or in the share of the partners. Whether the amended section would require the assessee to file a certified copy of the partnership deed along with the return of income? - Held that - requirement of a certified copy of the instrument of the partnership deed being filed along with the return of income for assessment years commencing from 1st April, 1993, only applies to firms which seek to be assessed as a partnership firm under the Act for the first time after 1st April, 1993. There is no warrant to restrict the meaning and the scope of subsection 3 of Section 184 of the Act. Accepting the submission on behalf of the Revenue would necessarily require reading words into subsection 3 of Section 184 of the Act to the effect that it would apply in respect of the assessment as a firm was first sought after 1st day of April, 1993 . It is a settled position in law that fiscal statute is to be strictly construed As the appellant firm was assessed as a partnership firm prior to Assessment Year 1993-94 and as there has been no change in share of the partners, the appellant assessee would continue to be assessed as a partnership firm in the subject assessment year. Decided in favour of the appellant assessee and against the respondent revenue.

Summary

Issues:
1. Interpretation of Section 184 of the Income Tax Act, 1961 regarding registration of a partnership firm.
2. Determination of whether a change in profit-sharing ratio among partners necessitates filing a certified copy of the partnership deed for assessment.
3. Assessment of a partnership firm based on amendments to Section 184 from April 1, 1993.

Analysis:
1. The case involved a partnership firm seeking registration for Assessment Year 1993-94. The firm was previously assessed as a registered firm for the preceding year. The issue arose when the Assessing Officer refused registration due to the firm's failure to submit a certified copy of the partnership deed with the return of income, as required by Section 184 of the Act.

2. The Commissioner of Income Tax (Appeals) held that the requirement for filing a certified copy of the partnership deed applied only to new applicants seeking registration after 1983-84. However, the Tribunal overturned this decision, citing a change in profit-sharing ratio evidenced by provisions for salary and interest for partners, as required by Section 40(b) of the Act.

3. The appellant argued that the provisions for salary and interest were to comply with Section 40(b) and did not alter the firm's constitution or partners' shares. The respondent contended that the execution of a new instrument indicated a change in profit-sharing, necessitating the filing of the partnership deed.

4. The Court held that the payment of salary and interest did not affect the profit-sharing ratio specified in the partnership deed. They emphasized that if there was no change in the firm's constitution or partners' shares, the firm should continue to be assessed as a partnership firm, as per Section 184(3) of the Act.

5. The Court disagreed with the Kerala High Court's interpretation that the amended Section 184 required filing the partnership deed for assessment from 1993-94 onwards, irrespective of prior assessments. They emphasized strict construction of fiscal statutes and resolved any ambiguity in favor of the assessee.

6. Ultimately, the Court ruled in favor of the appellant, stating that since there was no change in the firm's constitution or partners' shares, the firm should be assessed as a partnership firm for the subject assessment year. The appeal was allowed in favor of the appellant.