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TMI Blog1983 (5) TMI 91X X X X Extracts X X X X X X X X Extracts X X X X ..... s of clause 9 capital of Rs. 2 lakhs. It was also provided that the parties may withdraw amounts which they thought necessary and such withdrawals would be debited to the personal accounts of the partners. According to clause 17 the profits or losses were to be shared by the partners as under : Shri G.R. Govindarajulu 30 per cent Shri G. Devarajan 35 per cent Shri G. Rangaswamy 35 per cent In due course the assessee-firm closed its accounts on 31-12-1978 and the calendar year was the relevant accounting period for the assessment year 1979-80. On 17-11-1978, that is before the close of the accounting period, an application in Form No. 11 was filed before the ITO, which application was dated 3-11-1978 and the certificate which becomes relevant for the decision of the present appeal given was as under : " We do hereby certify that the profits (or loss, if any) of the previous year/period up to the date of dissolution will be/were divided or credited as shown in the Schedule and that the information given above and in the Schedule is correct. " 2. In the order refusing registration the ITO mentioned that the accounts of the erstwhile firm were closed and the assets and liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad the right to seek every clarification that was necessary to determine whether the firm was genuine or not and eventually he concluded that since the profits were not distributed according to the terms of the instrument of partnership, the assessee-firm could not be granted registration. 3. Against the order of the ITO the assessee appealed to the Commissioner (Appeals), who briefly set out the background of the case. According to him the expression 'constitution' would only mean the personnel composing the firm. He sought to derive support for this interpretation by referring to proviso (i) to section 184(7) of the Income-tax Act, 1961 ('the Act'), which spoke of a change in the constitution of the firm or the shares of the partners. According to the Commissioner (Appeals) the ITO was not justified in refusing registration to the firm. 4. Before us the learned departmental representative referred to the judgment of the Allahabad High Court in Setha Ram Dhanvir Singh v. CIT [1980] 123 ITR 150 and submitted that registration could be granted only to a 'genuine firm' and the expression 'genuine firm' denoted that a firm was in existence, that the partners were collectively carr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the firm refers to the identity or the partners and their shares in the profit or loss of the firm business. The ITO has to be satisfied that there was in existence a genuine firm with the constitution so specified. Genuineness by itself is not enough. Genuineness has to be considered in the light of the specified constitution if it is found that the partners have in the instrument of partnership indicated their shares, but in fact they have, while dividing the profits or losses adopted some other shares, voluntarily and knowingly, it will be a case where the firm, though in existence, is not a genuine firm with the specified constitution. " The above observation of the Court shows that registration can be refused in cases where the partners have voluntarily and knowingly, while dividing the profits or losses, adopted some other shares other than the shares as specified in the instrument of partnership. In Khanjan Lal Sewak Ram v. CIT [1972] 83 ITR 175 the Supreme Court had occasion to review various pronouncements on the aspect relating to the grant of registration where a part of the profits were not distributed or the full profits were not disclosed and only the disclosed prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y divided, the certificate that the profits earned had been correctly divided in the manner shown in the application would be false. A case came up before the Allahabad High Court where the profits were not divided in terms of the shares as specified in the instrument of partnership. A deviation was found occurred due to inadvertence of the accountant with reference to the provisions of section 185 and the relevant rules relating to the application made for the grant of registration. The Allahabad High Court in the case of CIT v. Hari Ram Khanna [1979] 116 ITR 886 observed as under : " At the instance of the Commissioner, the Tribunal has referred the following question of law for our opinion : 'Whether, on the facts and in the circumstances of the case, registration under section 185 of the Income-tax Act, 1961, for the assessment years 1962-63 and 1963-64 could be granted to the assessee-firm ?' The facts are not in dispute. The application for registration was made in time and in the proper form. It complied with all the requisite formalities including the declaration which is required to be made that the profits of the firm will be divided or credited as shown below, name ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eturn the profit-sharing allocation of the entire profit of the year was shown strictly in conformity with the shares as specified in the instrument of partnership. We consider that the present case clearly falls within the ratio of the Allahabad High Court decision referred to above and, therefore, the denial of registration would be erroneous. 7. We also look at the case from another angle. Section 271(4) of the Act reads as under : " If the Income-tax Officer or the Appellate Assistant Commissioner or the Commissioner (Appeals) in the course of any proceedings under this Act, is satisfied that the profits of a registered firm have been distributed otherwise than in accordance with the shares of the partners as shown in the instrument of partnership on the basis of which the firm has been registered under this Act, and that any partner has thereby returned his income below its real amount, he may direct that such partner shall, in addition to the tax, if any, payable by him, pay by way of penalty a sum not exceeding one and a half times the amount of tax which has been avoided, or would have been avoided if the income returned by such partner had been accepted as his correct ..... X X X X Extracts X X X X X X X X Extracts X X X X
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