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TMI Blog1977 (11) TMI 77X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of 4:4:2. During the accounting year there was a change in the profit sharing ration in the firm w.e.f. 1st April, 1973. The partnership deed was drawn on 2nd April, 1973. In that, it was provided that the profits and losses will be shared equally. This partnership deed was current only for one accounting year. There was again a change in the subsequent accounting years. 2. In the books of accounts of the assessee firm the profits were distributed to the partners in the ratio 4:4:2 i.e. the old ratio and not in equal shares. the return was filed by the assessee on this basis only. The partners' WT returns were also filed in old ratios. The ITO took up the case for examination of accounts and noticed this position. It was brought to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disregard of the current partnership deed. Elaborating further Shri Perumall pointed out to the duration of the existence of the mistake. Innumerable opportunities must have been given to the partners to see the books of accounts after the accounts were made up and till the matter was brought to their notice by the ITO a period of nearly two years. During this point the returns of the firm along with the statements were filed on 29th Oct., 1974. While signing the statements a mere glance therefore would have impressed any casual observer that the profits were not dividend equally. Still some of the partners are alleged to have noticed it. The partners themselves had filed their own individual returns at a latter date. They had one further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd, the assessee's case is that it was a mere oversight which was subsequently rectified and the Department's case is that the deed of 2nd April, 1973 was never intended to be acted upon or in the alternative there was not in existence during the previous year a genuine firm with the constitution specified in the instrument of partnership. 6. There can be no conclusive test to be applied to find out which of the two contentions would be correct. It appears to be question of decision after considering the surrounding facts and circumstances. We had gone through the reported cases apart from the decision of the Kerala High Court in 71 ITR 109 on which reliance was placed by the assessee. There is no clear guidance from these case laws. In 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iewed by the partners as business expenditure. So that is not relevant for the question of registration. However, they had succeeded the Kerala High Court in observing "any error in the computation of the profits of the partners, in our view, does not give a right to the Income-tax to reject an application". In these cases the High Courts were referring to the computation of profits of a firm which is a step anterior to the allocation of the profits to the partners. But the auction regarding arrears administered by the High Courts would be equally applicable to the allocation of profits among partners. The decision in Madanlal Chhaganlal (50 ITR 477) case also relates to the determination of the profits of the firm anterior to the allocatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arose out of an error. Under s. 185(1)(b) the ITO has to be satisfied that there was (i) a genuine firm and (ii) that the constitution specified in the deed. Constitution could mean as per s. 187(2) 'Personna of the partners as well as their profit sharing ratio'. Now the assessee firm has not undergone any change in the personna of the partners. The same three partners were there in the earlier years also. Upto and including the asst. yr. 1973-74 registration has been granted. So the ITO is satisfied that the firm with these three partners is a genuine firm. So on this account registration cannot be refused. Then the only question is regarding share of profits. Was it or was it not according to the deed ? The answer to this question would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the ITO is that deed reducing their profit sharing ratio is not intended to be acted upon. If there was a fraud intended by Shri Ganapathy Chettiar and Shri Krishnan Chettiar what they would have done is to continue to have a higher profit but for the purpose of IT returns take advantage of the partnership deed of 2nd April, 1973 and show profits accordingly; not the other way about as was actually found. So we do not think any a fraudulent intention could be spelt out in respect of the two of the main partners. It is these two partners who were in the higher income brackets and so change in the profit sharing ratio would have the impact on the total tax liability of the partners. If there was no fraudulent intention then what had happene ..... X X X X Extracts X X X X X X X X Extracts X X X X
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