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TMI Blog1983 (2) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... ance for the year 1974-75. Clause 13 of the deed is as follows : " For the sake of convenience and to facilitate the obtaining of works by tenders, etc., contracts of allied activities may in appropriate cases be taken in the name of the firm or in the joint or individual name or names of the partners. No Partner shall have individual business of the like nature as long as he is a Partner in the firm." (underlining by us). The firm applied for registration for the year 1973-74. The ITO by his order dated February 25, 1975, held as follows: "After having gone through the deed of partnership and also the accounts produced before me at the time of examination, I am satisfied that there was a genuine firm in existence during the previous year and grant registration to the firm for the assessment year 1973-74." (Enclosure to assessment order for the year 1973-74. Annexure dated February 25, 1975). The assessment was made on the assessee as a registered firm. The total income determined was Rs. 1,02,690. For the assessment year 1974-75 the assessee filed a declaration under s. 184(7) of the I.T. Act praying for the continuation of registration. It is seen from the assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellate Tribunal and assailed the order of the Commissioner. The Appellate Tribunal disagreed with the views expressed by the Commissioner. The Appellate Tribunal held in para. 8 of its order as follows : " It is not the case of the Department that the assessee-firm is not genuine firm. Nor is it the case of the Department that it is unlawfully constituted. Clause 13 of the deed, no doubt, provides that no partner shall have individual business of the like nature as long as he is a partner in the firm. It is true that under s. 16(b) of the Partnership Act, if partner carries on an; business of the same nature and competing with that of the firm, he is to account for and pay to the firm all the profits made by him in that business. The case of the assessee is that the provisions of clause 13 were varied by mutual consent by and under which the managing partner was allowed to carry on similar business in his individual capacity. Even assuming that it was not so, we fail to understand how registration can be denied when once it is found that the assessee-firm is a genuine firm and has been lawfully constituted. It may be that the partners could claim that the income derived by S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s specified in the instrument of partnership, and so if under cl. 13 of the deed of partnership, it was interdicted that no partner shall have an individual business of the like nature as long as he is a partner in the firm, and it turns out that the managing partner had business of the nature carried on by the firm in his individual capacity and derived income therefrom, then " the constitution of the assessee-firm as specified in the instrument of partnership ", ceases to exist. In such case, the firm is not entitled to registration since its constitution is not as specified in the instrument of partnership. In support thereof, counsel relied on the decision in R. C. Mitter Sons v. CIT [1959] 36 ITR 194 (SC), and stressed the following passage occurring at p. 198 : " It is manifest that for a true and proper construction of the relevant provisions of the Act, relating to registration of firms, sections 26, 26A and 28, and the rules summarized above, have to be read together. So read, it is reasonably clear that the following essential conditions must be fulfilled in order that a firm may be held entitled to registration: (1) That the firm should be constituted under an inst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the partners. The assessee's counsel also contended that even assuming that there has been no proper variation of cl. 13 of the deed that will not be a circumstance for denying registration to the firm. When once it is found that the assessee firm is a genuine firm and has been lawfully constituted, it is entitled to registration. The fact that the partners can claim that the income derived by the managing partner, Sri K. C. Thomas, in his individual capacity on similar contract works also should be made available for being divided among them, considering such income as the income of the assessee-firm, will not alter or affect the constitution of the firm as specified in the instrument of partnership. The fact that such income has not been offered for the assessment of the firm or such income has not been allocated amongst the partners will not render the firm anything other than a genuine or lawfully constituted firm. On a consideration of the relevant clause in the partnership deed, and the provisions of law applicable to the case, we are of opinion that the decision of the Tribunal is right. The meaning of the crucial words " Bs constitution (firm's) as specified in the instru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kes some profits unauthorisedly or some secret profits it will not bring about a change in the constitution of the firm or in the profit-sharing ratio. The remedy for the partners aggrieved lies elsewhere and it is his or their personal right. That has nothing to do with the genuineness of the firm, and does not affect the legality of the firm. As held by the Supreme Court in CIT v. Sivakasi Match Exporting Co. [1964] 53 ITR 204, at p. 208: " A combined effect of section 26A of the Act and the rules made thereunder is that if the application made by a firm gives the necessary particulars prescribed by the rules, the Income-tax Officer cannot reject it, if there is a firm in existence as shown in the instrument of partnership. A firm may be said to be not in existence if it is a bogus or not a genuine one, or if in law the constitution of the partnership is void. The jurisdiction of the Income-tax Officer is, therefore, confined to the ascertaining of two facts, namely, (i) whether the application for registration is in conformity with the rules made under the Act, and (ii) whether the firm shown in the document presented for registration is a bogus one or has no legal existence. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the document, a substantially new contract is made out. It is not open to the I.T. authorities to register a document which is different from the one actually executed and asked to be registered. That decision is clearly distinguishable and will not apply to the facts of this case. Here, the registration given was for the very document which was executed between the parties and there is no vitiating element in the said document. The deed is valid for all intents and purposes. The registration is given only for the document so executed by the parties. It may not be out of place to mention the circular letter of the Board of Direct Taxes, F. No. 26/3165-II(AI), dated May 20, 1967 (Direct Taxes Circulars-Taxmann, Vol. I1977 edn., p. 522) wherein the Board has clarified the ground on which registration to a firm can be refused. After referring to a few decisions including C. Srinivasa Rao and Brothers v. CIT [1967] 63 ITR 102 (Mys) and CIT v. Sivakasi Match Exporting Co. [1964] 53 ITR 204 (SC), referred to above, it is stated therein : "Further, even if the payment of salary to a partner is prohibited by section 13 of the Partnership Act, it would not effect a change in the sharin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of partnership on that ground. If it is the case of the Department that the partnership deed relates only to the business mentioned therein, then all that the Income-tax Officer should have done is to register that partnership deed in respect of the business mentioned in it and treat the other business as that of an unregistered firm. If, on the other hand, the Income-tax Officer's conclusion was that the partnership deed covers all the four businesses mentioned in the statement of the case, then be bad to register the partnership deed produced and treat it as a deed relating to all the businesses. In either case, he could not have refused to register the deed in question." We are of opinion that, broadly, the said reasoning could be applied to the instant case also. We say " broadly " because the observation that the business not mentioned in the deed should be treated as that of an unregistered firm is seen to have been commented by the editors of Kanga and Palkivala in Law of Practice of Income Tax, 1976 Edn., at p. 1017, as " incorrect ". In the light of the above discussion, we hold that the Income-tax Appellate Tribunal was justified in setting aside the order of the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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